



ECONOMICS 



W* <r# Lingwortby Taylor 



Colleges, High Schools, 
and It 






LIBRARY OF CONGRESS. 



Chap. Copyright No. 

Shelf_HLB_A_l 1 • 5 
-TTM 

UNITED STATES OF AMERICA. 



Write Your Own 

Political Economy 



EXERCISES 



COLLEGES, HIGH SCHOOLS, AND 
INDEPENDENT STUDENTS 



TKll. (3. Xangwortbg Gaslor 

professor of political Economy ant> Sociology in 
tbe "dntvcrsits of Iftebrasfca 



LINCOLN, NEBRASKA 

THE UNIVERSITY PUBLISHING CO. 

1900 



/ 



51599 



Library of Goa-jretw 



SEP 25 1900 

Copyright antry 

SECOND COPY. 

Ubiiverad to 

QhDfcti DIVISION, 

00 1 1c) i^uu 



I 1 ' 



COPYRIGHT, 1900, BY 

W. G. IyANGWORTHY TAYLOR. 
ALL. RIGHTS RESERVED. 



Jacob North & Co., 
Printers, Lincoln. 



AUTHOR'S NOTE 

The following introduction includes, as its last part, 
an address delivered before the High School Section 
of the Nebraska State Teachers' Association, Decem- 
ber, 1897. The rest of the book appeared in the North- 
western Journal of Education in the year 1898-99. 
The whole has been thoroughly revised. 



CONTENTS 



Introduction Y 

A Word to Teachers xxi 

I. Fluctuating Prices 1 

Trading a Rifle for a Canoe 10 

The Price of Cobs on a Market Day 10 

The Price of Fish on a Market Day and in the Long 

Kun 1:L 

II Steady Prices 13 

The Price of Spool Thread by the Gross 25 

The Price of an Acre of Arable Land 26 

Is Wheat Higher Compared with Spool Thread in 

New York or North Dakota ? 27 

III. Profits ?,S 

On What does the Income of a Manufacturer of 

Thread Depend? 37 

On What Does the Income of a Farmer Depend? 38 

IV. Wages 40 

The Wages the Farmer has to Pay for Common Labor 49 
The Wages the Manufacturers of Spool Cotton Have 

to Pay the Spinners 50 

The Wages the Manufacturer Pays his Foreman — 51 

V. Speculation 52 

The Income of a Physician 61 

The Gains of an East India Merchant One Hundred 

Years Ago 61 

The Profits of a Firm of Corn Buyers Who Own 

Elevators 62 

The Dividends of a Stockholder in a Railroad 64 

VI. Industry 65 

The Interest Received by a Holder of Railroad Bonds 73 

When Does a Corn Speculator Gain? 74 

The Selling Price of a Painting 75 



iv CONTENTS 

What are the Motives that Characterize the Industry 
of the Farmer? 76 

VII. Industrial Centers 78 

What are the Advantages of the Elgin Watch 
Factory? 85 

What has been the Influence of the Erie Canal Upon 
the Wealth of the United States ? 86 

The Prohibition of States to Lay Duties Against one 
Another 87 

VIII. A Rich Country 89 

How does One become Rich ? 97 

How does Society become Rich ? 98 

What is Wealth? 99 

IX. Luxury 101 

Does the Expenditure on a Yacht do more Harm than 

Good? 107 

What is Capital? 108 

Of What Good is Convict Labor? 109 

X. Capital 110 

Is it Better to "Make Money" or to "Post" at the 

University? 117 

Of What Good are Strikes? 118 

Of What Good are Usury Laws? 119 

Appendix 121 



INTRODUCTION 

ON THE STUDY OF POLITICAL ECONOMY IN THE HIGH 

SCHOOLS 

I. 

In this introduction no attempt is to be made to 
dictate a curriculum for the high schools. It will 
simply be shown that the public and Science are both 
ready for the introduction of political economy into 
the high schools, and that the methods of political 
economy are sufficiently developed to allow such in- 
troduction. 

The public is ready and for a long time has been 
ready for economic instruction. If the subject of eco- 
nomics has been surrounded by violent prejudices, 
by class and party hatred, that has only the more em- 
phasized the necessity that it should develop its 
methods of instruction. The passions alluded to, 
however, have made it much more difficult for econom- 
ics to develop a method than for other sciences. In 
the natural sciences, the method of investigation has 
practically suggested the method of instruction; in 
history, method has come later, because of the feelings 
clustering about historical topics; and in political 
economy the difficulty has been still greater. 

Education is the acquiring of self-consciousness 
about everything that affects our career. Our career 
is to be taken in the broadest sense as embracing 



vi EXERCISES IN ECONOMICS 

both the individual and society. But self-conscious- 
ness can only arise when a certain power of distin- 
guishing fact from fiction, history from legend, reality 
from imagination, the objective from the subjective, 
is acquired, and this power only comes when senti- 
ment, passion, or even undue feeling is banished or 
repressed. Naturally, it is concerning the most im- 
portant things that sentiment lingers longest and 
passions swell up strongest. Hence it happens that 
in the history of culture it is the most important sub- 
jects, the social phenomena, that are the last to attain 
to due scientific precision in thought. 

But the great hindrance in the teaching of political 
economy has lain in the inherent difficulty of the 
subject, for it requires the most intense employment 
of deductive thought. In other words, it carries the 
mind beyond the ordinary chain of reasoning em- 
ployed by the ordinary business man. There is noth- 
ing that people shrink from so much as exerting their 
minds beyond the ordinary line of effort. Most men 
will rather go without a meal than attempt the effort 
necessary to consecutive thinking. As Professor 
Macvane 1 suggests, the test of the difficulty is in the 
length of time taken into view. When considering 
public matters, business men embrace only the same 
length of time that they embrace in considering their 
private affairs. Now, for the operation and working 
out of public affairs and of public interests, a longer 
lapse of time is necessarily involved; and the whole 



1 "The Economists and the Public," S. M. Macvane, the Quarter- 
ly Journal of Economics, Jan., 1895. 



INTRODUCTION vii 

difficulty will be found to turn about the greater 
effort necessary to trace the influences that enter into 
the longer period. 

Many evil consequences flow from the lack of recog- 
nition of the difference in the reasoning necessary in 
public and in private business : for example, nothing 
is more common than the claim that economists are 
"theorists," and that their conclusions do not corres- 
pond with the facts. This claim may be refuted in 
various ways. In the first place, it is extremely ab- 
surd to suppose that if a man devotes his whole life 
to investigation along economic lines, the necessary 
consequence is that he knows less than a man who 
has paid no especial attention to economic thought. 
In the second place, the objection is founded upon a 
total misapprehension as to what the consequences 
inferred by economists are. The person who makes 
the objection is not yet ready to understand an 
economic conclusion, and therefore puts into the 
mouths of economists what does not belong there. 
And, in the third place, the claim that economists 
do not pay attention to the facts can be met by a com- 
plete tu quoque— it is the haphazard thinker that does 
not pay attention to the facts. 

Nevertheless, with the rise of scientific thought in 
matters pertaining to outer nature, it has become 
more and more possible to reason calmly and more 
exactly upon matters pertaining to our inner nature 
and to society. The ability to objectify overflows, by 
sheer surplus of energy, from natural science upon the 
field of industrial, mercantile, and domestic interests. 



v iii EXERCISES IN ECONOMICS 

This is shown by the fact that in our universities six 
times as many hours were devoted to economic instruc- 
tion in 1892 as in 1876. 1 The present number must 
be much greater. This attention to economics is be- 
ginning to find its way from the universities into the 
high schools, and more especially into the high schools 
of the West. It may be that the high schools of the 
East are wise in leaving economic studies to the uni- 
versities, but at least the public demand and the in- 
terest of teachers are manifested by the movement 
that has taken place in the West. This movement, 
however, has as yet not nearly attained the import- 
ance which the subject and the interest in the subject 
demand, and it is our business here to further it. Our 
economic life is the basis of all of our life. Without 
it we should have no higher life. It is thanks to the 
great inventions, to the organization of labor, and to 
the great increase of production that we are able to 
progress in religion, in morals, and in esthetics. Our 
morals are therefore in a sense the effect of our en- 
vironment. A science which looks upon the environ- 
ment as the cause, and upon the standard of living, 
in the broadest sense, as the effect must afford funda- 
mental training in social thought. 2 

II. 

A few words will now be appropriate in order to 
show that the science itself has reached a point where 
it is abreast of other sciences and therefore prepared 

i "The Study of Political Economy in the United States," J. Lau- 
rence Laughlin, The Journal of Political Economy, Dec, 1892. 
2 "The Theory of Social Forces," sec. 1, Simon N. Patten. 



INTRODUCTION l X 

to claim its share in moulding the whole educational 
curriculum, from the district school up through the 
university. The economic period of history has ap- 
peared last. We have seen that the passions of 
men have been with much difficulty subdued upon 
questions to which economic thought is vital. It 
may easily be perceived why economics, regarded 
as an item in the development of science in gen- 
eral, has reached a late perfection. Economics re- 
quires, as a condition precedent to its development, 
a high degree of perfection in the methods of all the 
other sciences; indeed, in the first place it required 
the development of a separate subject-matter; it re- 
quired a distinct industrial life, which only became 
dominant in the last part of the eighteenth century. 
As already remarked, the power of dispassionate rea- 
soning was perhaps first cultivated through the natu- 
ral sciences. Moreover, the natural sciences promoted 
those habits of observation and of induction which 
are necessary to economics. Nevertheless, economics 
rose rapidly upon the heels of the natural sciences, 
and already in the first half of the present century 
the declaration was not uncommon that the science 
of political economy was now perfect. This statement 
proves to have been a foolish one. A science can 
never be perfect so long as it remains a science. The 
complex of cause and effect can never be fathomed 
by man, and economics is now progressing more rap- 
idly than ever. What would you say of zoology or 
botany, if an eminent student of those sciences should 
declare that they were now perfect? The charge, 



x EXERCISES IN ECONOMICS 

therefore, that political economy is not complete is not 
intelligently made. The charge that it is not as com- 
plete as other sciences is ignorantly made. Political 
economy will probably respond to every test that can 
be made of a science. Its conclusions are as true as 
those of any other science. They are no more hypo- 
thetical than those of any other social science. If ca- 
pacity for mathematical measurements be taken as the 
test of a science, political economy is fully equal to 
the test. It has arisen as a science should arise, first 
with private students, then spreading into the uni- 
versities, which are the seats of original investigation, 
and gradually making its way down through the vari- 
ous grades; and it is in these processes of dissemina- 
tion from the top through the whole structure that 
we are now engaged. 



III. 



There is no doubt that the public is ready and even 
eager for economic instruction. There is equally little 
question that the science of economics has already at- 
tained to the full stature of a science, and that in 
point of maturity and completeness it does not need 
to give way to any other science, whether so-called 
"natural'' or "social." The only question, therefore, 
remaining to be considered is the very important one 
of method of instruction. It is one thing to pursue 
knowledge for its own sake, and quite another thing 
to impart the results attained. In this question of 
method of instruction, a movement is now taking 



INTRODUCTION xi 

place that is destined to fulfil all requirements, so 
that we are justified in saying that economics is now 
almost complete as a branch of education. 

In order to choose the proper method, it will be 
necessary for us to take a glance at the various de- 
partments of the science itself. For our purpose, two 
kinds of economics may be recognized: the one con- 
sisting of those psychological studies which involve 
metaphysical powers of generalization and the dis- 
tinction between subjective and objective; which pre- 
suppose a mathematical training and lead up to a 
complicated conception of organic life. This kind of 
economics is evidently fitted for the university alone. 
The work of classification of economic phenomena, — 
that is to say, the work of research and investigation 
undertaken by our candidates for the second and third 
degrees, — is of course also only to be undertaken by 
mature minds and hence restricted to the university. 

There is, however, another kind of economics which 
belongs to the earlier stages of the science, and which 
is therefore perhaps better adapted to the earlier 
stages of the growth of the individual mind. This 
economics is suited to the lower college classes and to 
the last years of the high school. It is the economics 
of the so-called "orthodox school." Perhaps the state- 
ment that this kind of economics is adapted to the 
class of students mentioned may cause some surprise, 
and I hasten to add that it should not be taught in 
the ordinary way and with the mere use of a standard 
treatise as a text-book. 

Before further explanation of the proper method of 



xii EXERCISES IN ECONOMICS 

teaching orthodox economics, I should not omit to 
state that a third and lower stage of economic in- 
struction is possible. This is adapted to the lower 
grades, to graded, and even to district schools. It con- 
sists in simple applications of the results of the psy- 
chological economics pursued in the university. A 
study of these methods would amply repay every 
teacher. How far teachers who are not students of 
economics would appreciate these methods I am un- 
able to say. I would advise them, however, to make 
the experiment of applying them if possible. The 
whole suggestion comes from Professor Simon N. Pat- 
ten, 1 and I cite some of the topics which he suggests 
for primary instruction : "initial and final utility," 
e. g., if a boy eat two apples, the second apple gives 
less satisfaction than the first, but if the second be 
given to another boy, the other boy will get as much 
satisfaction as the first apple gives to the first boy; 
"in a group of pleasures and pains, the pains should 
precede the pleasures," i. e., pains grow if deferred, 
and deferred pleasures are also greater than immedi- 
ate ones; "a life of unalloyed pleasure," i. e., the most 
intense pleasures are selfish and solitary, while com- 
bined pleasures involving some pain give a greater 
total surplus; "the basis of credit," i. e., trust, honor; 
"the sacredness of unprotected property," i. e., the 
basis of all our advantages from association; "the 
harmony of consumption," i. e., many combined ele- 
ments give a better result than single pleasures, — the 

1 "Economics in the Elementary Schools," Simon N. Patten, An. 
nals of the Am. Academy of Political and Social Science, Jan., 1895. 



INTRODUCTION xiii 

mind learns to make esthetic associations; "the ejec- 
tion of discordant elements" ; "group pleasures should 
be given the preference above individual pleasures"; 
"the right of exclusion." 

Returning now to the proper subject of exposition, 
— the method of instruction suitable to the high 
schools, to the colleges, and to the lower classes 
of the university, — two paths are open to us. The 
first path has been already mentioned, the teach- 
ing of orthodox economics. It is true that the 
mental effort involved in complicated logical dem- 
onstrations is very great, so great that in the 
present state of preparation of students for this 
work, colleges are generally able to undertake it 
only in the junior year. As presented by John Stu- 
art Mill and by the other approved text-writers, it is 
doubtful if this sort of political economy can ever be 
taught to persons younger than juniors, unless the 
teacher himself is an economist of long training. In 
that case, it is not Mill but the teacher who instructs ; 
and yet, as has been already remarked, this kind of 
economics is in a way suited for young minds, for it is 
not so much a system of philosophy as a systematized 
refutation of popular fallacies from a rather mate- 
rialistic point of view. The logic of the street-corner 
and hustings is employed with greater precision than 
at the street-corner and hustings, with the result of 
modifying or overthrowing many of the conclusions 
there reached. It is simply a case of carrying out 
with plenty of time and ample deliberation the same 
argument which is too hastily pursued in popular dis- 



xiv EXERCISES IN ECONOMICS 

cussion and in "campaigns of education." Mill con- 
tains no attempts at metaphysical refinement, at abso- 
lute standards, and at exact measurements. He sys- 
tematically controverts half-logic and half-education. 
Nevertheless, Mill can not be otherwise than ex- 
tremely hard even to the trained mind, notwithstand- 
ing his clearness and beauty of diction. The question 
arises therefore whether work like his may not be pre- 
sented in better form for beginners. 

It has occurred to the present writer that the ques- 
tion is not so much one of simplification of Mill 
as it is one of avoiding fixed conclusions. The 
great trouble in economic instruction is that the 
student is apt to reach premature practical con- 
clusions. He is apt to take a bias in favor of 
free trade or of protection, in favor of one system 
of taxation or of another; and this bias unfits 
him for further economic work. He is apt to think 
that he "knows it all," that he does not need further 
economic instruction, and that he has mastered the 
science, whereas, as a matter of fact, he has hardly 
touched its threshold. In order to avoid premature 
conclusions, which are apt to be intensified by lack of 
experience on the part of teachers, it has occurred to 
the present writer that the deductive reasoning of 
the orthodox school may be, as it were, inductively 
taught. He has therefore tried the experiment of 
having students write their own political economy. 
The principal topics of production and distribution 
are proposed as subjects for essays. A dozen or 
twenty suggestions are made under each topic as to 



INTRODUCTION XV 

how it may be treated. The student is then required 
to make an internal inspection of his own experi- 
ences and observations with respect to a given topic 
and to write an essay in view of his own experiences 
and with the help of the suggestions offered. The 
teacher, in giving out the topic and suggestions, adds 
suggestions of his own. The essay when completed 
is subjected to criticism. All comment on the political 
bias of the writer is studiously avoided. The criticism 
is confined purely to a discussion of misstatements of 
fact or of failures of logic. As in the science itself, 
so in the special topic, there are no hard and fast con- 
clusions. The mind of the student has been exercised 
and made flexible and curious with respect to the 
topic. That is a sufficient result. He will be eager 
for further discussion and for further instruction. 
If he does not go up to the university, but goes directly 
from the high school to business, this curiosity will 
follow him, nevertheless, through life, and his habits 
of systematic argument formed in the high school or 
college will make him a more conservative citizen than 
he otherwise would have been. 

The danger of instruction in economics by teachers 
who are not themselves economists is very great. I 
believe such instruction has had much to do with the 
small effects of economic teaching upon public 
opinion. 1 How can it be expected that, when teachers 
are not thoroughly trained in economics, they can turn 
out pupils with broad views, free from prejudice, and 

i "The Problem of Economic Education," Simon Newcomb, the 
Quarterly Journal of Economics, July, 1893. 



r*N - to learn from new exper: The in- 

! rt I n mi s, i. e., 
th lomics of 1 lox t 

qnal : : f the •" ...:__ I act 

ar _ rfered 

•"ill. it is hoped, be useful in 
the hand - h of those wh and of those wl 

not sped 
I now eome t notiier method of wsl 

' political economy and preparatory 
I the s — commercial geography and in- 

dustrial -r'er to indue ; this i ibject un- 

T h e B - _ 
:ly form a part of the 
curriculum of - i I in the preparation : 

the fin the university, and 

litical my for the high 

- '.. .. -' not expect I 

onomic history . g 
although it may be exagg ol of 

zrew up nt as ii rn, 

re; I - -;. IHng political e i 

:.iic history as the sole 
warm he 

v and -id sehooli ended in ol 

mutual reeognitk 

be closely allied with 
history; and 
rider thai ho ha 

91 to these in 

With these d 



INTRODUCTION xvii 

cussions we have nothing to do except in so far as they 
serve to emphasize the importance of economic his- 
tory. It has already been shown that serious diffi- 
culties attend instruction in political economy — even 
the political economy of the argumentative schools of 
Mill and Ricardo. The first great advantage, there- 
fore, in the substitution of economic history for polit- 
ical economy, is that so severe mental preparation on 
the part of the teacher is not necessary. 

The second advantage from the study of economic 
history is that it is an excellent preparation for the 
subsequent study of political economy. Economic 
history is no other than the collection and placing by 
themselves of the economic facts in history : the indus- 
trial revolutions wrought by the great inventions, the 
changes in the course of commerce, the changes in 
the organization of industry and in its connection 
with civic family life, the changes in the habits and 
standard of living of the every-day people, the new 
methods of transportation, etc. This study may 
even be investigated historically by the method of 
original sources. Again, the students may be re- 
quired to report upon the agricultural or manufac- 
turing industries found in their neighborhood, to 
classify them, to investigate the habits of life of the 
people about them, and to record them simply as mat- 
ters of fact useful for future reference. These studies. 
however, are not to be pursued as a training in the 
"source method" nor as a training in distinguishing 
"what is a fact." That excellent work economics 
leaves to the department of history. Certainly, eco- 



xviii EXERCISES IN ECONOMICS 

nomic history should assist political history in all of 
its purposes and as surely will the former be assisted 
by the latter. The study of economic history from 
good authorities should give the high school student 
a fund of knowledge as to industrial, commercial, and 
social development which will be useful to him 
through life. If he pass through the high school 
to the university, he will be prepared to study politi- 
cal economy, that is, to reason carefully and exhaust- 
ively upon the facts already familiar to him, and to 
deduce laws which he has already inductively sus- 
pected. If he go directly from the high school to 
business life, he will retain forever a strong impres- 
sion of the lessons of history and will thereby be ren- 
dered a more conservative and solid citizen. 

If history is a study of facts, then political economy 
is a study of reasons. Political economy is essentially 
analytic, and political economy and history must nec- 
essarily supplement each other in the formation of a 
comprehensive conception of society. 

I have now presented the two economic studies 
which seem to me to be suitable for introduction into 
the high school and lower college classes. Of the 
two, I recommend most unreservedly economic his- 
tory for high schools. It is perhaps less liable to abuse 
and misuse and more satisfactory to young minds. 
Political economy, properly so-called, I recommend 
chiefly for large high schools and colleges where 
the principal or some teacher has had economic 
training at the university; and even in such cases 
it should be taught with care and with full con- 



INTRODUCTION x j x 

sciousness of the danger of creating premature bias 
in the minds of the students. The importance of 
economic studies is incontrovertible. The only ques- 
tion is as to the possibility of making of these a popu- 
lar education. Education is not primarily composed 
of the branches most important to man's well being, 
but of those branches which have been sufficiently de- 
veloped so that they may be taught among the 
developed branches. The choice is then, and then 
only, governed by relative importance with respect to 
man's well being. Since political economy is suffi- 
ciently developed to serve the purposes of instruction, 
it must necessarily be chosen as perhaps the most im- 
portant subject connected with man's well being. It 
treats of the basis of his whole higher career, which 
would be impossible without an industrial foundation. 
It has heretofore been excluded from the curriculum 
by a compromise which acknowledged its importance 
but denied its development. This argument can no 
longer stand against it, and nothing can prevent the 
shaping of the whole educational system with refer- 
ence to it. 

The high schools offer courses in civics and in his- 
tory. Why not in economics, or at least in economic 
history? It is true that multiplicity of courses in the 
high schools is inadvisable. Surely all fads of instruc- 
tion must give way to economics, which is the most 
developed of the sciences treating the universal foun- 
dation of both individual and social life. 

The high schools must be portions of an organic 



xx EXERCISES IN ECONOMICS 

educational unity 1 so arranged that the pupil may 
proceed most expeditiously and thoroughly from the 
lowest to the highest branches of knowledge, and yet 
so arranged that if the pupil drop out at any stage 
he may have gained the greatest possible advantage 
from the length of time already devoted to study. 
In such a scheme our proposed methods of instruction 
lit completely. 2 

A partial list of works on economic history will be 
found in the appendix. 

i "The High School System," L. R. Harley, Annals of the Am. 
Academy of Political and Social Science, Sept. 1896. 

2 "Economics as a School Study," Frederick R. Clow, Economic 
Studies, Am. Economic Association, June, 1899. (Price 50c.) 



WRITE YOUR OWN POLITICAL ECONOMY 
A WORD TO TEACHERS 

The title of this book indicates the method pursued. 
It does not indicate the method of thought but the 
method of instruction; it indicates further that the 
instruction i& intended to be self-instruction. Since, 
moreover, the?e can be no instruction which is not 
essentially self-instruction, a certain form of endeavor 
is here esteemed best to accomplish self-instruction of 
the beginner. This is a form which will call forth 
his activities ano thus illustrate at the outset the 
principle that man's activity, even more than his 
wants, is calculated to further his progress. The 
stimulation of mental effort is sought to be pro- 
moted by written exercises. These exercises con- 
sist, so far as the contribution of the teacher is 
concerned, in titles suggestive of crucial economic 
topics, and also in seme dozen suggestions for the 
treatment of each exercise. The primary intention 
is that the exercises be, on the part of the student, 
an original analysis of the situation suggested. 
Whether he be encouraged to read the text- writers for 
assistance in his analysis or be discouraged in seek- 
ing for aid outside of his own consciousness, or, at 
most, outside of discussion with parents and com- 
rades, will depend upon bis stage of advancement. 



xxii EXERCISES IN ECONOMICS 

Doubtless it is preferable that separate sets of exer- 
cises be composed in the future for different ages and 
capacities. Since, however, it is believed that progress 
can only be made through internal spontaneity of 
thought, it is better that, in all cases of doubt, re- 
course to the text-writers be discouraged, and that 
only in exceptional cases of strong and advanced 
minds in whom the critical faculty has already some 
development such reference be permitted. / 

The teacher should first discuss the exercises before 
the class, including the suggestions (aL (&), (c), 
etc. On a subsequent day, the students should bring 
in their original essays. In no case should the doc- 
uments handed in be allowed to consist of a series 
of categorical answers to the suggestions accom- 
panying the exercises, nor should they be confined 
to the suggestions, but should include as many 
new points as the students can thitfk of. In the case 
of each student, there must be an/original purposive 
arrangement of materials calculated to demonstrate 
a central theory which has germinated in his mind. 
The students must therefore avo/d discussing the sug- 
gestions in the order in whic}/ they are given. In 
other words, they are to follow the obvious principles 
governing the construction of a literary essay ; and it 
will be found that the intense human bearing of the 
subjects discussed will exert/ a most beneficial influ- 
ence upon the ability of the students to employ lan- 
guage and expression. Experience has demonstrated 
that economic exercises assist the teacher of English 
at least as much as English studies and rhetorical in- 
struction assist the teacher of economics. 



A WORD TO TEACHERS xxiii 

When the essays have been read by the teacher, a 
general criticism upon the tendencies observed in 
them may be made before the class. It is here that 
the greatest discretion and prudence are required, for 
the danger is very great that pupils be encouraged in 
making some final conclusion. That such conclusion 
might redound to the credit of this or that political 
party is neither here nor there; for whoever under- 
takes economic instruction should hold himself above 
the breath of suspicion of current political bias or 
affiliation. Of the danger of partisanship, therefore, 
it is superfluous to speak. The other danger — that of 
preconceived conclusions — has a real pedagogic in- 
terest. The merit that is believed to lie in the self- 
instruction herein advocated is precisely this, that if 
the method be properly employed the student will be 
impressed with the fact that he has begun the study 
of a large and ever- widening subject, which reaches 
down into the fundamental facts of human existence, 
and with which he has only begun to familiarize him- 
self as a field of study, without any presumption of 
finally settling any question. 

Usually three topics will be presented under a sin- 
gle title. Each topic is for a separate student-essay ; 
but the titles will be discussed in the text as a whole 
and with little or no reference to the separate essay- 
topics. 

Those wishing to purchase standard works to read 
in connection with these topics are recommended to 
the following: Marshall's Principles of Economics 



xxiv EXERCISES IN ECONOMICS 

(fourth ed.), Hadley's Economics, Davenport's Out- 
lines of Economic Theory, Davenport's Elementary 
Economics, Boehm-Bawerk's Positive Theory of Capi- 
tal, and, of course, John Stuart Mill (Laughlin's 
ed.). 



CHAPTER I 

FLUCTUATING PRICES 

The question naturally arises why separate titles 
have been adopted for fluctuating and for steady 
prices. Surely, it will be said, there must be some one 
principle which governs in all questions of price. 
The objection is true in one sense and untrue in an- 
other. It is true in the sense that we are justified in 
always looking for a central principle in any group of 
phenomena that presents itself. We have a right to 
assume that the phenomena are grouped together be- 
cause they belong together naturally, and that some 
natural characteristic may be found common to the 
group. Now, prices evidently form such a group, and 
if we seek to break the group up into two are we not 
frustrating our object? 

The answer is that, admitting, and even strongly 
affirming, the necessity of central principles, it must 
also be borne in mind that a generalization may be 
too broad for practical utility; for, after all, we seek 
to understand, and it is possible that a generalization 
may be too broad to illuminate our understanding. It 
must always be borne in mind that a generalization is 
a human and finite method of progress. If we may 
consider progress to consist in the learning of truth 
and in those changes within the thinker that acconv 



2 EXERCISES IN ECONOMICS 

pany increased knowledge, then we must look upon 
"general" reasoning as a mere method whereby a cer- 
tain characteristic common to all the individuals of 
a group is made to represent them. It will, therefore, 
be seen that the breadth of the generalization that 
should be made is a practical question depending upon 
the nearness to reality and the vividness of imagina- 
tion that flow from it. 

Now, if we attempt to subsume the whole topic of 
value under the head of a single explanation, it will 
be found that that explanation will fail in vividness 
and reality, especially for the beginner, because it can 
be nothing that is peculiar to the economic field, but 
only something that is common to all organic life. In 
other words, it can be nothing else than a general prin- 
ciple of adjustment, known to prevail everywhere 
and always, to which biological rather than social or 
economic science has most loudly called attention. 

It is true that value is the central point of the 
science of political economy; in fact, is the science. 
It is the central concept of adjustment, from which 
the explanations of all phenomena of industry radiate 
like the spokes from the hub of a wheel. Such a cen- 
tral point at once is a mental necessity, and represents 
an outward fact. It is a mental necessity because, as 
above implied, all reasoning is representative, that is 
to say, we analyze by letting some characteristic rep- 
resent the whole, and by then observing resulting re- 
lations. An example drawn from common experience 
will sufficiently substantiate this statement. A land- 
scape produces an effect upon a traveler sufficient for 



FLUCTUATING PRICES 3 

most purposes of art or industry, although it is impos- 
sible that he either physically see or mentally appre- 
hend each leaf and each blade of grass. Nature pro- 
vides for him a short-cut by allowing him to generalize 
in the physical act of seeing and in the mental acts 
that correspond. Science proceeds upon the same nat- 
ural principles and seeks to use practicable substi- 
tutes to supply the place of the limited senses with 
which we are endowed. 

It follows naturally, then, that if we choose a cer- 
tain field of investigation, like political economy, over 
which we can not at first cast a sweeping and satisfy- 
ing, comprehensive glance, we can, at least, take parts 
of the field and pursue within them severally our rep- 
resentative process, and may then even assemble our 
representative concepts and try to find in turn what 
is common in them, thus pursuing a re-representative 
process, or a representative process of the second de- 
gree. Thus the field of analysis in economics is very 
broad, and it does not follow, because one has not 
made the last analysis, that therefore he has not made 
progress. 

One difficulty in too broad a generalization being 
that it is not sufficiently characteristic of the special 
field of inquiry, it is therefore well to take up different 
part-fields, where we shall be more sure to discover 
characteristic principles. One way of doing this is 
to consider separately those cases in which we notice 
the most frequenc}^ and errtent of oscillation in prices. 
By separating these cases from those in which we 
have observed prices to be most stable, we shall be 



4 EXERCISES IN ECONOMICS 

able to select interesting distinctions of principle and 
influence. Undoubtedly the analogy of physics is the 
most useful to us, and we shall obtain great assistance 
from the habit of looking upon economic influences 
as forces. We must remember, however, that we are 
dealing with the kingdom of mind and not with the 
kingdom of matter, and this reservation will be the 
occasion of fruitful discussion in the numberless cases 
in which we shall have to call in the physical analogy. 

It is true that in almost any business a daily or even 
hourly fluctuation of prices may be observed, while in 
the same business it is possible to conclude that, on 
the whole, prices average so and so with little change. 
In other businesses, little dependence may be placed 
on the general level of prices in the long run ; and in 
still others, there is slight daily fluctuation. 

In trading a rifle for a canoe, in selling a by-product 
of industry, such as corn-cobs, or in dealing in the 
fish market, affected as it is by the run of fish, the 
weather, and the occurrence of religious feast days, 
we may seek to investigate the simpler influences con- 
nected with prices. We should here begin our inves- 
tigation with the physical environment, and we shall 
naturally find that it is such as accompanies the less 
complicated phases of civilization. Each of the 
concrete topics is drawn from industrial conditions 
that have existed most exclusively before the in- 
dustrial revolution took place one hundred and fifty 
years ago, not to speak of more modern improvements, 
and that still exist on the frontiers of industry. Let 
the student endeavor to enumerate all of the symp- 



FLUCTUATING PRICES 5 

toms of a stage of industry so little advanced as the 
one implied; not only the inventions for production, 
but the methods of life, of consumption, of recreation, 
and even of political and religious thought. He will 
then perceive that these different phases of life are 
not independent, and that in following back the single 
category of economics, he is losing most of the whole 
view of life in order to gain more of one side of it, and 
thus ultimately to know more of all. If now he seek 
the most important distinction for his purpose be- 
tween the old and the new civilizations, he will find 
that the element of Time is preponderant. Under 
primitive conditions, short calculations are made, and 
therefore we are enabled to study the circumstances 
that affect prices in two widely separated environ- 
ments by noting that environment which is character- 
ized by short and that which is characterized by long 
calculations. 

This way of dividing the subject on a time-basis 
may not be the best, but it is at least scientific, for it 
adheres strictly to the facts. By noting carefully 
our environment, we come finally to perceive that all 
of the phenomena which we find existing together at 
one time are characteristic of each other, so that if one 
of the phenomena be given to us, the others may be 
supplied. In this way, the paleontologist will, from 
a fossil tooth or femur, reconstruct for you a marvel- 
ous creature, with an assurance that inspires confi- 
dence; or the horse- wrangler on a Dakota ranch will 
tell you, as soon as he discerns and recognizes one 
animal roaming far from the "bunch," which are its 



6 EXERCISES IN ECONOMICS 

comrades that are likely to be found hidden behind 
the nearest "divide." 

While the primitive economy excludes inquiries re- 
specting the industrial forces that play in Time, it 
leaves us, for this very reason, free to weigh other 
motives. A price that is not affected by previous cal- 
culations must be the result of circumstances in which 
the parties find themselves suddenly. 

And, first of all, let us inquire what is the nature 
of the subject matter with which we are dealing : does 
it belong to the world of matter or to that of mind? 
It is true that the frontiersmen exchange a canoe 
against a rifle and a pair of moccasins: all material 
substances and industrial products. In their own 
minds, the advantages of the "sale" may appear ma- 
terialistic, for by means of the canoe the one man may 
perform a journey, the object of which may be the ex- 
change of peltry for groceries, while with the rifle the 
other man may intend to stock his larder with venison. 

It does not concern us, however, what theories they 
have about their acts ; it is our business to make theo- 
ries, not theirs. But what does concern us is the con- 
sideration that we are not dealing with these material 
products, but with the intentions of the men with re- 
spect to them and with respect to each other, and with 
their feelings in connection with the material objects 
and with each other. Feelings and intentions are not 
material things, and with feelings and intentions we 
have sol el} 7 to do. 

Again, we are not called upon to treat of all the 
causes of feelings and intentions, except so far as we 



FLUCTUATING PRICES 7 

need a background for our picture. It is evident that 
the intention to take a trip for the purpose of trading 
may depend upon infinite moral and physical influ- 
ences, upon the sense of decent well being, on family 
duty, upon the changing of the seasons; such studies 
are beyond our specialty. We must confine ourselves 
to the inquiry as to how given motives work, and as 
to what is their nature when once created from what- 
ever origin. 

The economic act is the trade. The economic mo- 
tive is that of advantage, whatever be the principles, 
moral or customary, which form an ideal or type of 
advantage within the trader's mind. He does not nec- 
essarily seek the disadvantage of his opponent; it is 
sufficient to suppose him to seek his own advantage. 
Advantage, when used in this connection, is usually 
represented by the term "utility." Now we can not 
consider utility to him as inhering in the material 
object, e. g., the canoe. We find the utility, not in 
the canoe, but in the man. If we found it in the canoe, 
and if we were to say that if the canoe were absent 
the utility would cease, and therefore the utility is 
inherent in the canoe, we should have to conclude that 
two canoes would contain twice the utility of one 
canoe ; three canoes, three times the utility, and so on ; 
whereas the slightest observation shows that the prob- 
ability is that the utility of the several canoes would 
decrease as their number increased, although it is 
again possible that under exceptional circumstances 
the contrary might hold true. We must therefore al- 
ways go to the minds of the parties for our ultimate 



8 EXERCISES IN ECONOMICS 

economic facts, for it is there alone that we can meas- 
ure the forces which control the material objects of 
trade, and which are called into being perhaps by 
those objects. It is perhaps true that even as investi- 
gators our attention was first stimulated by material 
objects; but we soon find that they are not the sub- 
ject matter to be handled. 

The confusion that exists in the popular mind be- 
tween utilitarianism and materialism is thus dis- 
closed and explained. Utility is the relation of hu- 
man desire and human welfare with respect to an 
object; and since it is human desire and human wel- 
fare that concern us, Ave must look for our subject 
rather within the minds of industrial men and not 
in material objects. A utility may be materialistic in 
its origin ; but it is psychic in its nature. 

Accurate analysis involves the idea of measure- 
ment, and it is the close association of measurement 
with physical objects that conspires to chain our 
minds to them. There is, however, no reason why 
measurement should not be as accurate in the case of 
a thought, motive, or feeling as in the case of a tree. 
A test of the perfection of a science is certainly the 
grade of mathematical accuracy to which it has at- 
tained, and since we are, in economics, only dealing 
with the mind, all that is necessary is that we be able 
to affirm that one motive is as strong as, or is twice 
as strong as another. Thus, in the sale of the canoe, 
the motive to sell may not be so strong as the motive 
to acquire the rifle, but may rise to the point of selling 
when the moccasins are offered to boot. In a monev- 



FLUCTUATING PRICES 9 

using society, people spend their money in direct pro- 
portion to their desire for things, and there it is per- 
fectly right to say that a man thinks twice as highly 
of a thing for which he pays twice as much money. 

Further discussion of the circumstances that sur- 
round fluctuating and short-time prices will not be 
gone into at present. Enough has been said to enable 
the student to discuss the question as to whether both 
parties gain by an exchange, as to their usefulness to 
each other, and other questions suggested under the 
topics. The discussion of subsequent chapters will 
necessarily throw light upon the preceding ones. 



D EXERCISES IN ECONOMICS 

TOPIC I 

Trading a Rifle for a Canoe 

(a) Imagine an environment. 

(&) Is the title of this topic a social act? 

(c) Does it establish a rule or "uniformity"? 

(d) What is the object of each party? 

(e) Is there a public point of view in this case? 

(/) What motives would cause one party to demand and the 
other to yield something "to boot," say a pair of moccasins? 

(g) Is their point of view material (i. e., physical) or imma- 
terial (psychic)? 

(h) Do they use a measure or measures of any kind, like a 
yard stick in measuring a quantity of cloth? 

(i) Is either party better off after the trade? Are both better 
off? Are they better producers? Better consumers, i. e., obtain- 
ing greater satisfaction? 

(j) Would their gain be more probable if they were dealing in 
a regular market for rifles and canoes? 

REFERENCES 

Keynes: Scope and Method of Political Economy, ch. IV, sec. 1. 
Davenport: Outlines, chs. I-II; Elements, chs. I-III. 
Marshall: Principles, bk. Ill, chs. I-IV. 
Hadley: Economics, ch. III. 

Boehm-Bawerk: Positive Theory of Capital, bk. Ill, chs. I-VI. 
Walker: Political Economy, part III, ch. I. 
Jevons: Theory of Political Economy, chs. I-III. 
W. G. L. Taylor: "Generalization and Economic Standards," 
University of Nebraska Studies, January, 1897. 

TOPIC II 
The Price of Cobs on a Market Day 

(a) What is a "market price"? 

(&) Its relation to the buyers and sellers as classes? Do they 
all buy and sell at the same price? Do any? How many? How 
many sales on the Board of Trade are at the prices quoted in the 
papers? 



FLUCTUATING PRICES 11 

(c) Is the supply all the cobs that could be bought up, or that 
are actually on hand, or that are actually produced, or something 
else? 

(d) Is the demand all that people could buy, or something else? 
How many people? 

(e) Environment. Distinguish from essay I: number of per- 
sons; time occupied by the transaction; supply and demand. 

(f) What are the constant factors in your reasoning, and what 
the variables? Do the constants and variables change places at 
different stages? 

(g) Is "price" more "regular," less "speculative," less depend- 
ent upon individual advantage or superiority than in paper I? 

(h) Do individuals derive any advantage from living together, 
in this. matter of price? How as to their own production? Their 
own calculations? 

REFERENCES 

Cairnes' Pol. Econ: part I, chs. I-II, IV. 

Laughlin's Mill: bk. Ill, ch. I, sees. 1-4. 

Marshall: bk. V, ch. II. 

Boehm-Bawerk: bk. IV, chs. I-IV. 

E. B. Andrews: Institutes of Economics, sec. 63, n. 3. 

Davenport: ch. IV; Elements, ch. V, esp., sec. 34. 

TOPIC III 

The Price of Fish on a Market Day and in the Long Run 

(a) How do fish differ from cobs in the time taken for their 
production, in perishability, and in their other characteristics, 
and hence affect supply? Environment. 

(&) What is the effect of these peculiarities ol. >emand and on 
price? 

(c) Are the peculiarities of production so prominent when we 
consider fishing as an stablished industry? Environment. 

(d) Can you draw a sharp line, in the nature of the calcula- 
tions, foresight, etc., involved, between (a) (&), on the one hand, 
and (c), on the other? Note the growing importance in these 
topics of the element of Time in production. 

(e) What differences in social development and civilization 
does this topic presuppose from topic II? Is the market price 



[2 EXERCISES IN ECONOMICS 

more or less a uniformity for all society? Can we, in any sense, 
look on society as a unit? 

(./) Distinguish the constants and variables of the argument. 

(g) What relation has your discussion to individuals and to 
society, — as to welfare, as to present people, as to future people? 

(7i) What advantage does the individual draw from a market? 



CHAPTER II 

STEADY PRICES 

The splitting of the question of prices into the two 
titles of "steady" and "fluctuating" is in order to 
allow the application of the test of Time. The words 
"steady" and "fluctuating" do not of course indicate 
principles; they are simply characteristic of the gen- 
eral conditions in which principles may be realized. 
They indicate results, the causes of which must be 
inquired into, but not the causes themselves. We 
have seen that a primitive economy offers conditions 
under which we are constrained to look upon the 
parties to a bargain as confronted with a sudden situ- 
ation; not that the two frontiersmen had not, for 
some time before, foreseen the mere possibility of 
making an exchange, but that exchanges with them 
were a matter of such rare occurrence that they were 
not reduced to a plan and system, and were not in- 
volved in a complexity of preparation. In fact it is 
the simplicity of the preparation upon which we must 
lay stress, and this is so true that we may practically 
leave the preparation out of account as an element too 
insignificant to play a part in our inquiry. The prin- 
ciple here applies which the lawyers embody in the 
phrase de minimis non curat lex, and which the math- 
ematicians would comprehend under the statement 



U EXERCISES IN ECONOMICS 

that in a static problem infinitesimals may be disre- 
garded. 

The primitive environment, therefore, enabled us 
to conclude that even under the very simplest con- 
ditions the economic problem is essentially a subjec- 
tive one, and that demand and supply are but two 
elements into which the thought may be analyzed 
which accompanies an exchange. Our simple suppo- 
sition, moreover, enabled us to perceive the relation 
of economic life with the non-economic, which we 
found to be so close that it seemed hardly useful to 
separate them. In fact, there would be no advantage 
in separating economic from other social sciences, 
were it not that as our supposition becomes more 
complicated the separation becomes a necessity for 
purposes of analysis. 

Since any set of circumstances is taken to be sud- 
den, it follows that one set of circumstances offers 
little experience for the regulation of another, and, 
what amounts to the same thing, offers little possi- 
bility of drawing inferences from one set that will be 
applicable in another. Hence we may look for the 
most extraordinary fluctuations of prices in the prim- 
itive economy, and hence also it is that, as a matter 
of fact, history discloses to us only that, before the in- 
dustrial revolution agricultural products varied five 
or even ten-fold in price on successive years, but that 
in one and the same season the variation in price 
between two districts that would now be regarded as 
neighboring was then so great as to amount to a glut 
in the one and to a famine in the other. 



STEADY PRICES 15 

The enormous widening of modern markets has 
been accompanied by no corresponding increase in 
price fluctuations, but rather with a diminution. The 
advent of a world-wide supply and demand has been 
accompanied by a corresponding corrective of adjust- 
ment in price ; and aberrations of price have come to 
cause equally nice adjustments of supply and demand. 
It behooves us, therefore, to inquire what new prin- 
ciples of action and what new conditions of man's ac- 
tivity have arisen to work this revolution. An analy- 
sis which shall throw light upon this question must 
probe deep into the nature of social man ; for we note, 
as the most prominent feature in the new state of 
affairs, the social nature developed within man. 

The cosmic character of the problem may be briefly 
and appropriately stated at the outset. Increasing 
steadiness of price, if it is to have an unbounded de- 
velopment, can result in nothing but absolute fixity of 
price. We may then for a moment look upon all 
prices as having reached a perfect uniformity. The 
rate of exchange of all products in the community re- 
mains absolutely the same for all time. Now this sup- 
position is in no other sense untrue than the mathe- 
matician's supposition of a straight line, and does not 
mark out economics as a science less exact than math- 
ematics. 

Our task is to form a realistic conception of the 
state of affairs just contemplated. Can we regard 
society as progressing, or as merely living, or as al- 



1(3 EXERCISES IN ECONOMICS 

ready dead ? As to progress, we may conclude that it 
is removed, at least from the economic sphere, by 
the stoppage of all fluctuation in prices. As to 
life or death, the question wholly depends upon the 
nature of the equilibrium of prices established. If 
the equilibrium be one imposed arbitrarily by some 
force coming from without society, then the very na- 
ture of the expression implies death, for no thing can 
live except through its internal activity in natural 
relation with external forces. If, on the other hand, 
the equilibrium be reached through internal develop- 
ment up to such a point that all contending elements 
may be supposed to have attained to a state of har- 
mony never to be disturbed again, then we have the 
supposition of a golden age, where expectations ever 
wake afresh to sure realization. 

If there were in nature such a thing as a complete 
realization of an idea (or, in mathematical language, 
the possible attainment of a limit), even then the at- 
tainment of the living equilibrium could only occur 
through internal development. 

The mistake of untrained and hasty reasoning upon 
social subjects is generally that it strikes the other 
and inorganic note of dogmatism: it impatiently at- 
tempts to cut the Gordian knot of progress, and by 
the supposition of an external dcus ex machina en- 
deavors to introduce the final stage at a stroke. As 
already stated, logic is logic, whether met upon the 
street corner or before the court in banc; it is the 
primitive weapon of all man's achievements. The fail- 
ure of popular logic, therefore, is not in its mode, but 



STEADY PRICES 17 

in its breadth. In the absence of patient enumeration 
of conditions and of untiring analyses of them, it seeks 
a short cut by which it attempts to realize something 
which it has not been able to conceive. 

Doubtless the distinction noted between successful 
and unsuccessful thought is one to which these papers 
will from time to time recur. 

In this connection it is only necessary further to 
note that the supposition of prices that have reached 
a perfect equilibrium was made for the sake of ar- 
gument. It was a sop thrown to Cerberus in order 
to enable us, by going a part of the way with a great 
popular error, thereby to refute the whole. We can 
not look upon prices as ever possibly reaching a fixity. 
Not only is the environment of man a changing one, 
— the tides, the phases of the moon, the alternation 
of the seasons, earthquakes, volcanoes, inundations, 
storms, the very uncertainty of the spots on the sun — 
but his own being lives and thrives in flux and change. 
The subject of steady prices, therefore, leads us back 
by a few short steps into the profoundest problems 
of ontology. 

The understanding of the more complicated civiliza- 
tion may fitly be approached through the fundamental 
distinction between Space and Time. Since the ele- 
ment of Time was noticeably absent in primitive civ- 
ilization, that element was used as the means of dis- 
tinguishing the two stages. The element of Time thus 
stepping into the foreground in the later stage, could 
hardly fail to bring with it its constant companion, 
Space. If, therefore, we seek to characterize the later 



18 EXERCISES IN ECONOMICS 

period, in thought drawn from the most fundamental 
conceptions of the universe, we can not avoid begin- 
ning with these two elements; and we shall find that 
in their manifestations industrial life is completely 
embraced. 

For a moment, therefore, we may allow ourselves 
to take Space, affected by the advent of Time, as a 
test. Division of labor may be conveniently viewed 
first as a function of Space. Industry, like territory, 
is divided into myriad fields; and the truth is literal, 
for, with the early appearance of agriculture, we may 
suppose different products to have been cultivated in 
different fields, and thus a difference in industry to 
have been necessitated from the very circumstances 
of the partitioned space. But no sooner do the phe- 
nomena of Space multiply, than they create out of 
themselves, as it were, the phenomena of Time. Va- 
riety of production can be of advantage to no one 
without exchange; otherwise each man in his isolated 
economy remains as devoid of variety of enjoyment as 
though all produced the same crop. But such is the 
nature of things that variety of enjoyments can only 
be assured by that waiting which is necessary in 
order to effect exchanges. Division of labor, there- 
fore, can not become effectual for man's benefit un- 
less it involve a necessary lapse of Time. Thus Wait- 
ing, with all the countless intellectual and moral qual- 
ities which it implies, stands forth as the herald of 
the later dispensation. 

Having indicated some of the necessary universal 
principles without which the more special reasoning 



STEADY PRICES 19 

could not proceed, let us now turn to the latter. In a 
primitive economy the exchange took place at the 
instant of equilibrium between the desire to sell the 
canoe and the desire to purchase the rifle. We noted 
that this equilibrium was purely mental. It could 
not be a relation between such disparate things as a 
canoe, on the one hand, and the desire for the rifle on 
the other. Nor can it be an equality of mental forces, 
for the two men have entirely separate standards of 
action and valuation: equilibrium and equality are 
very different things. The exchanges in a complex 
civilization must similarly take place at a point of 
equilibrium of mental forces. In the primitive case 
the control of those forces passed beyond the economic 
sphere ; their final action alone could be recorded. In 
the complex civilization, the economic sphere is much 
larger and economic forces can be traced back much 
further, before they emerge and are lost in the general 
environment; for Time has now entered the economic 
sphere, and we can observe its steadying hand in the 
maintenance of the equilibrium of price. An orig- 
inally momentary equilibrium, lacking all stability, 
now becomes stable, and, although constantly dis- 
turbed, tends with pertinacity to return to a normal 
position. 

Infinitely complicated as is the process in the de- 
tails of industrial life, its general traits stand out 
with sufficient boldness. The circumstances of Space 
for a given business, like the manufacture of cotton 
thread, are fairly determinate. In production, the fol- 
lowing are some of them : the manufactory is often 



20 EXERCISES IN ECONOMICS 

most conveniently located at a great distance from the 
field where the cotton is grown. It may also be lo- 
cated at a great distance from the coal mines. Many 
products of iron are used, ranging from the Bessemer 
steel of the rail to the finest ingot steel of some parts 
of the tools and machinery. Bricks, wood, food, and 
clothing for the workmen — all must be provided and 
wrought into proper forms. The technical details 
of this provision are matters for countless trades and 
for the industrial sciences which pertain to them. 
What concerns us is the broad fact that these details 
are consciously present in the mind of the captain of 
industry who manages the business. His mind grasps 
them in their largest aspects. 

Now all these circumstances of Space (and I here 
include most specifically those arrangements of mat- 
ter in Space which constitute the great inventions and 
characterized the industrial revolution — such as the 
invention of the steam engine and of the flying 
shuttle) are representatively or re-representatively 
present in the mind of the captain of industry, and 
cause him to calculate. But calculations always re- 
late to the past and to the future. In his mind, the 
prominent facts are not those arrangements of mat- 
ter in space called a steam engine or a flying shuttle, 
but how long, through the action of engines and 
shuttles, it will take the yarn to become cloth; how 
much cloth others will be enabled to demand of him as 
a result of the arrangements in Space (i. e., inven- 
tions) obtaining in their industries; and consequently 



STEADY PRICES 21 

what discounts he is justified in requesting at the 
bank — their amount and their time to run. 

It is not necessary for the purpose of the present 
argument to formulate a separate law which may 
afford a measure of the correspondence of Time-with- 
Space-adjustments, although that has been attempted 
with considerable success by von Boehm-Bawerk. All 
that we need to do is to show the existence of some 
correspondence between Space and Time in the meth- 
ods of production. Indeed, it is often true that new 
space arrangements actually shorten the time of pro- 
duction; and while the general contrary contention, 
i. e., that inventions in the long run lengthen the 
time, is maintained by the author alluded to, we may 
here be satisfied with the general proof that those 
arrangements that invite interchange involve Wait- 
ing. 

We are now but a short step from the full explana- 
tion of steady prices. The brief analysis of complex 
production needs but little supplement. One would 
naturally expect that the difference between sudden 
environments and those which are attended with ma- 
ture, recurrent calculations would be precisely that 
between fluctuating and steady prices. Stripped of 
all minutiae, the simple fact is that the captain of in- 
dustry averages out the experience of the normal 
period of production: he knows that on the average 
the price of his materials and labor and wear-and-tear 
will be so-and-so. And again, that, on the average, a 
market will be found about enough higher than those 
expenses to pay him for his pains. This average holds 



22 EXERCISES IN ECONOMICS 

true, notwithstanding the fact that he is constantly 
contending with the producers of raw material on the 
one hand, and with the purchasers of the final product 
on the other, day by day, and in many places, for an 
advantage in price as buyer or seller. 

In fact, the lesson here sought to be most strenu- 
ously inculcated is not that the normal calculations of 
the captain are made in spite of the daily struggle, but 
that those calculations are the healthy and normal 
result of the daily struggle. It is life that produces 
rules and not rules that produce life. Every price 
is a symptom of life activity, and the absurdity of a 
legal scale of prices as a matter of principle is glar- 
ingly manifest to one once imbued with the conviction 
that social life is as highly organic as is vegetable life. 
It is not denied that practical exceptions to the appli- 
cation of this principle obtain. Instance the tariff of 
prices established by a military governor in a con- 
quered province, as by General Wood at Santiago de 
Cuba. Such exceptions will be further mentioned 
when we come to the discussion of chapter V., Specu- 
lation and Monopoly. 

In principle, therefore, the steadying effect of all 
time-calculations is manifest. The captain of indus- 
try naturally tends to demand the normal price, or 
w T hat on the average he thinks will pay. Of course, 
many men in his place would charge the highest price 
they could get for the moment. But such men are 
"back numbers." They belong to the old era of fluc- 
tuating prices. They can not maintain themselves in 
developed industry, where it is so easy to "spoil the 



STEADY PRICES 23 

market" by overcharging. The modern captain of in- 
dustry looks ahead a long way. It may be longer or 
shorter, but still it is far enough to constitute a 
normal period and a normal price. If he charges 
more, he will lose his customers; if he charges less, 
he will lose his profits; and while the daily contests 
of the market will lead him above and below the line, 
he is fully conscious that he can not hold to an ex- 
cessive price and can not afford a very low one. An 
analogous situation in a very small way is afforded 
by the case of a merchant tailor who makes an ar- 
rangement with one of his customers, whereby he 
otters to furnish the latter with trousers at ten dollars 
apiece, year in and out, the customer to be allowed 
to select any goods in the stock of the tailor, and the 
tailor to stand the loss if the goods selected happen to 
be so expensive as to eat up his profits. In the long 
run, the tailor calculates to have sufficiently the best 
of the bargain to afford him customary profits. 

It has been stated above that agricultural prices 
have grown much steadier within the last two cen- 
turies; but it is evident that agricultural industry is 
not capable of the steadiness of price of which some 
others are capable, because it is so directly influenced 
by the seasons. The equalization of agricultural 
prices is accomplished much more through transpor- 
tation and speculation than through calculations 
made by farmers, who are the manufacturers of agri- 
cultural products. It was, therefore, better that our 
illustration of steady prices should be taken from an 
industry in which the raw material alone and not the 



24 EXERCISES IN ECONOMICS 

final product is agricultural. In both cases, however, 
the tendency is for prices to become steadier. Some- 
body makes the calculations which anticipate a 
normal period of production ; for we must observe 
that these calculations are divisible into two classes, 
those which relate to the supply and those which re- 
late to the demand, and hence to those persons who 
sell and those who buy. If, as in the case of agri- 
cultural products at the end of the harvest season, 
the supply is a tolerably ascertainable material quan- 
tity, then the speculators set busily about the work of 
adjusting the price of that supply to an anticipated 
demand. If, on the other hand, the demand be for, 
say, a certain class of cotton goods, consumed with 
little variation in quantity by a static people like that 
of Hindostan, then the adjustment will lie on the side 
of the materials, labor, rent, and other expenses on 
the part of the captain of industry. 



STEADY PRICES 25 

TOPIC IV 
The Price of Spool Thread by the Gross 

(a) The object of our inquiry is to ascertain the forces which 
result in the price. (In physics, the resultant of the forces.) 

(6) There must be an equilibrium — or there would not be a 
price. 

(c) How do the conditions of supply in this manufacturing 
business differ from those in topic III? Environment. Element 
of Time; nature of the manufacturing business. Element of fore- 
sight and of calculation. Analyze completely. 

(d) Are there more distinct forces in this case? Which forces 
take a more prominent part, supply or demand, at least relatively 
to the previous topics? 

(e) Are the new forces additional to those in the other cases 
or substitutes? 

(f) Are the calculations of one manufacturer the same as those 
of all? If not, how can we obtain in this case also a market 
price, i, e., a social result. How do calculations of all together 
differ from those of each? How is society benefited by their differ- 
ing? A difficult problem. Partly, the answer may be found in the 
truth that if the individuals did not differ, no uniformity could 
be evolved! Explain how this differing is called "competition." 
Different methods of manufacture, sources of supply, transport, 
etc. 

(g) What forces do you especially isolate for study in this case? 
The machines that make the thread, or the machines that make 
the machines? 

(h) What differences do you especially study? Market prices 
or rates of profit on capital — on machines that make machines, 
etc.? 

(i) What forces studied in this paper are outside of man, and 
what forces inside him? Are the latter natural? 

(;') What advantage does the individual draw from the circum- 
stances contemplated in this topic above what he can obtain in 
topics I, II, III? low prices of things not previously obtainable, 
or only by the rich; decrease of effort;, still more uniform prices; 
others benefit him as much as he benefits others, etc. 

(k) Show how a social life is attained through a market price. 



2G EXERCISES IN ECONOMICS 

REFERENCES 

J. B. Clark: Capital and its Earnings, Pub. Am. Economic 
Assn. 

Boehm-Bawerk : bk. I, ch. II; bk. II, ch. II; and pp. 403-406. 

Keynes: "Scope and Method," ch. VI. 

Marshall: bk. V, chs. III-V, ch. VII, sec. 5, ch. XI. 

Andrews: sec. 48, n. 1; sec. 65. 

J. B. Clark: Philosophy of Wealth, chs. I-VI (subjective and 
social). 

W. G. L. Taylor: A New Presentation of Economic Theory, 
Journal of Pol. Econ., Sept., 1897, pp. 518-22. 

TOPIC V 
The Price of an Acre of Arable Land 

(a) Does the price come from its immediate use or from all 
its future uses? Distinguish price from rent. Does the price 
cause the rent, or does rent cause the price? How can you cal- 
culate the price of a thing that is durable and will always be 
useful? 

(b) Enumerate all the differences between the supply of land 
and that of spool thread. Abundance, possibility of increasing, 
method of increasing. 

(c) Is land manufactured or discovered? Do railroads bring 
land to its purchasers? Differences in demand. 

(d) Is there in the realm of industry a sharp line of distinction 
between the calculations that settle the value of thread and those 
of land, or could you mention a large number of intermediate 
cases? 

(e) What calculations does the owner of the land make? (1) 
before purchasing, (2) after purchasing? In which of the last 
two cases is he distinguished from the maker of the thread? i. e. 
can he calculate as freely after purchasing as before? 

(/") Price of land in new and old countries. 

(g) Effect of improvements in cultivation, in drainage, in ma- 
chines. 

(h) Is land the source of all wealth? Distinguish carefully be- 
tween a physical foundation for further economic operations — 
food, clothing, shelter, pianos, paintings, etc. — and the utilities 



STEADY PRICES 27 

that reside in those products, i. e., is a thing more useful because 
more material? 

(i) What has "Time" to do with our calculations about land? 

(;') Distinguish land from man in every general way. 

REFERENCES 

Davenport: ch. I; Elements, ch. IV. "\ 

Boehm-Bawerk: bk. I, ch. I. (-Man and Nature. 

Keynes: ch. III. \ 

Boehm-Bawerk: bk. VI, chs. VII-VIII. ^ 

Marshall: bk. V, chs. VIII-IX. I Price of land. 

Davenport: sees. 82-91. j 

Mill: bk. Ill, chs. Ill; bk. IV, ch. I. 

W. G. L. Taylor: Values Positive and Relative, p. 81-93. Annals 
of Am. Acad, of Political and Social Science, Jan., 1897, or 
"Publications" No. 191. 

TOPIC VI 

Is Wheat Higher Compared With Spool Thread in New York or 

Dakota? How Will The Price of Wheat be in 

Dakota When it is as Populous 

as New York? 

(a) What would you say makes wheat high or low? thread? 
Is it because more labor is expended on the one than on the 
other? On which? How do you "get a start" in your calcula- 
tions? Is there such a thing as wheat being absolutely high, or 
only compared with former prices, or with thread? 

(b) Explain fully what is meant by saying that wheat is com- 
paratively higher in one place than in another. 

(c) Study and explain the "land" or objective elements of com- 
parison. Price of land; productivity of land; distance from 
market; cost of transportation. 

(d) State and explain the "man" or subjective elements of 
comparison. Density of population; inventiveness in agricul- 
ture; inventiveness in spinning; standard of living affecting de- 
mand for produce or manufacture respectively. 

(e) How high can wheat or thread go? How low? 

(f) Is there a necessary connection between the price of wheat 
and that of thread? 



CHAPTER III 

PROFITS 

We have seen that, in the primitive economy, the 
rate at which articles of wealth are exchanged against 
each other is determined at a point of equilibrium 
where the desires of both parties to the exchange are 
mutually expended in influencing each other and 
themselves. We have also seen that these desires cor- 
respond to conceptions or ideals of advantage which 
belong to the individuality of the exchangers, and that 
this, in turn, depends upon the state of civilization 
and upon the accidents of birth. Each party being 
competent to thrive within his own environment, and 
the exchange having been freely made as the result 
of his own sufficient calculations, it follows that each 
must find himself in a better position after the ex- 
change than he was in before it. There is, perhaps, 
no way of discovering which has gained more, for 
there is no means of measuring the advantage of one 
as compared with that of the other. The shrewder 
man has undoubtedly gained more than the less 
shrewd one; but it does not follow that the less 
shrewd has lost. 

In this primitive state, the questions of exchange 
and of gain are found united in extreme simplicity. 
The rate of exchange is the result of an equilibrium 



PROFITS 29 

of conceptions of advantage; and the exchange once 
made establishes the parties to it as the possessors 
of the advantages agreed upon. Thus the broad eco- 
nomic categories of exchange and of distribution are 
practically found in an undifferentiated stage of de- 
velopment. No money is as yet in use, and only gen- 
eral observation can determine whether the parties 
are making good use of their little market. If they 
are noticed to improve in their provision for life, to 
become gradually better clothed, better housed, and 
better fed, it may fairly be concluded that their gen- 
eral way of doing things is a good one, and that their 
habit of exchanging is no exception to their general 
thriftiness. 

But where are the wages and profits of this primi- 
tive economy? Every fact has already been brought 
within our anaylsis. The gains of exchange and of 
production have as yet raised no question of wages or 
profits. It will be said that society has not yet di- 
vided itself into capitalists and laborers. Are, then, 
the primitive people neither capitalists nor laborers? 
Can they receive neither profits nor wages? One 
thing is evident, and this is the one thing to which 
attention is here directed : the returns or income from 
the primitive economy arc the exchange-values. If, 
then, in a more developed economy, profits and wages 
are something different from exchange- values, we 
shall be interested in discovering in what that differ- 
ence consists. One would naturally expect it to con- 
sist in some peculiar development of exchange-value 
so prominent as to deserve particular study, and to 



30 EXERCISES IN ECONOMICS 

assume a character which would correspond to the 
common and quasi-popular topic of "distribution." 

It is here proper to advert to a confusion which 
exists in economic theory with reference to the mean- 
ing of the terms profits and wages, and which the 
method of treatment here proposed bids fair to clear 
up. There is evidently no reason for applying the 
term "profits" rather than the term "wages" to the 
exchange- values of the primitive economy; and yet, 
since these, together with rent, constitute the incomes 
of advanced society, we are justified in applying either 
term to the primitive increment. A part of exchange- 
value simply replaces the exchanged value, while a 
part is gain ; in other words, the goods we receive con- 
tain a greater value for us than those we part with. If 
we use the term "profits" for this primitive exchange- 
income, does it represent the whole income, or the sur- 
plus, or the replacement? The same question may be 
asked as to "wages." The custom of language inclines 
us to identify profits with surplus, and wages with 
replacement. This custom is partly the result of 
temporary conditions and partly the result of legal 
usage. The legal usage itself is probably dependent 
upon the economic conditions. It is customary, under 
legal sanction, for some parties to keep possession of 
the economic goods devoted to processes of production 
until a larger or smaller part of them are paid out to 
the others as their shares. The surplus becomes the 
property of the party in possession. 

The share of the capitalist is not necessarily an 
economic surplus, but is very commonly mistaken for 



PROFITS 31 

such surplus. That it is not necessarily a social sur- 
plus follows clearly from the circumstance that, in 
the long run, a division will take place between all 
parties, even though there be no excess above the re- 
placed values or even a loss. The capitalists who have 
undertaken the responsibilities of employment will 
finally succeed in reducing wages so that laborers will 
bear a portion of the loss, or they will retire from 

business. 

Correspondingly, it is customary to identify wages 
with the replacing values, because of the same crude 
assumption, that, since employers take the surplus, 
the laborers can not take it. The surplus, however, 
contemplated in popular phraseology, is entirely dif- 
ferent from the surplus contemplated by economics. 
In a short period it is true that the legal arrangements 
of employer and employed are determined upon a 
contract basis, and that the terms of the contract give 
the chances of gain during the existence of the con- 
tract to the employer. It may, however, happen that 
the rate of wages agreed upon was such as to preclude 
all possibility of gain on the part of the employer, or 
to foredoom him to financial ruin; and in case he 
makes, under the contract, unusual profits, it is pretty 
certain that, upon the renewal of the contract, the 
laborers will insist upon a larger share. Of course, 
they can only obtain an advance in case general trade 
conditions are favorable. 

It may be true that, under the special conditions 
existing at a particular epoch, the lion's share of the 
product may find its way into the pocket of one of the 



32 EXERCISES IN ECONOMICS 

parties to the disadvantage of the other. Brains, tal- 
ent, ability (we do not here speak of over-reaching, 
cunning, and unscrupulousness) habitually command 
a high reward. They have been commonly associated 
with that share of exchange-values called profits, and 
hence there is a certain justification outside of, and 
back of, legal sanctions for the association of profits 
with surplus. This association, however, is merely a 
habit of mind, induced by observations extending over 
certain periods or localities. When brains become 
more common than muscle, when responsibility and 
trustworthiness become more common than muscle, 
or are found more commonly united with muscle than 
with brains, then, unquestionably, the lion's share of 
the surplus will go into the pockets of the men of 
muscle. Of course this reversal of history is hardly 
probable; for the advance of society in mental and 
moral development tends to supersede the demand for 
muscle, and thus continually to keep it at a disad- 
vantage. As society grows more psychic, monopoly 
of muscle will be of little advantage, since society 
will have less and less use for it. 

Looking, however, at the question of wages and 
profits in its broadest aspect, there is no absolute ne- 
cessity for identifying either branch of income with 
either the gains or losses of society. If we seek a 
broad and universal framework for our conceptions 
of class relations, we must exclude from it any pre- 
conceptions as to which party is to obtain the ad- 
vantage in the bargain; and we are forced to this 
form of thought by the undeniable fact that laborers 



PROFITS 33 

do, as a matter of fact, receive some share of the 
surplus. As production increases, wages rise. 

It is, therefore, an unwarranted usage which iden- 
tifies profit with surplus, and wages with replacement. 
Such usage would compel us to say either that in the 
primitive economy there were no profits or wages, or 
that one part of the exchange value was profits and 
another part wages. The former alternative will not 
hold, for we can not say that the hunter of our illus- 
tration received neither profits nor wages. That 
would be a strange and artificial use of language. 
Nor will the latter alternative hold, for then we must 
say that his gains are all profits or all wages — an im- 
possible identification. The illustration of the primi- 
tive economy, therefore, shows us that the broadest 
framework, that which will leave us the most free 
to make changes fitted to all circumstances of Time 
and Space, must exclude the temporal prejudices that 
cloud our vision with respect to the relative advan- 
tages of profits and wages. 

Let us now pass to those characteristics which dis- 
tinguish profits from wages. Such distinction can 
only arise, as we have seen, in the higher civilization ; 
and this civilization we have characterized by the idea 
of Time. We have therefore to inquire what are the 
workings of Time upon the exchange value which con- 
stitutes the primitive income. The whole matter will 
be cleared up by reference to a new generalization : 
development does not wholly abolish the old, it rather 
adds the new ; it is a process of addition rather than 
one of transformation. A vulgar simile teaches that 



34 EXERCISES IN ECONOMICS 

a bucket full of shot has still room for a large quantity 
of water. Similarly, a highly developed civilization 
contains at least as many savages as could have ex- 
isted alone before the civilization was developed. 
Thus we perceive that it is not unnatural for the 
differentiation of exchange values to fall into differ- 
ent classifications in the measure in which correspond- 
ing industrial classes participate in the movement of 
progress. These classes, of course, are as numerous 
as we choose to make them by carrying closer and 
closer our microscope. The division of the exchange 
values between only two classes, capitalists and la- 
borers, is therefore a rude device adopted for the pur- 
pose of bringing forward for discussion certain broad 
questions of differences in participation in the social 
fund. 

It has been shown that the chief industrial elements 
in progress are certain rearrangements in Space 
known as the "great inventions," which characterized 
the industrial revolution of the eighteenth century 
and which are multiplying with an increasing rapid- 
ity to which Ave now pay little attention, unfortu- 
nately; for our social and political weakness lies 
chiefly in our ignorance of our own progress. The 
inventions of the last twenty-five years have perhaps 
added more than those of all preceding time to the 
exchange values that are subjected to distribution be- 
tween the static and progressive classes. These ar- 
rangements of Space comprise not only mechanical 
inventions but also chemical discoveries. The sepa- 
ration of chemical elements is theoretically as 



PROFITS 



35 



explainable on principles of Space as is the separation 
of physical elements into levers and cogs. 

Closely allied with that patience which inspires the 
brain of the inventor, or rearranger of matter in 
Space, are the patience and brains which appreciate 
the inventor's purposes and wait for the fruition of 
his plans. The progressive classes, then, are those 
who think, and those who watch and wait for better 
things. Doubtless many believe that they are wait- 
ing to a purpose who are merely amusing themselves 
with idle dreams. Such are surely swept into the 
ranks of the non-progressive by the inexorable laws 
of survival. Many think well and wait poorly, or 
lack the proper social nature to combine their thought 
with the waiting of others. Their one-sided thought 
relegates them to the large contingent of those 
who are discontented because they are filled with mis- 
conceptions. Many violate the laws of social ideality 
and are thus enabled to obtain an amount of exchange 
values which their aims and character neither justify 
nor dignify; their exchange values are apples of 
Sodom to them, but in many cases in the end help 
men, who are more honest. 

All parties to discussion about the industrial classes 
agree in a general tendency to set over manual labor, 
upon the one hand, against the complex that has just 
been alluded to of those who wait, who risk, who ab- 
stain, who calculate, who superintend, and who man- 
age, on the other. The chief controversies are as to 
the merits of these classes upon some ideal and 



36 EXERCISES IN ECONOMICS 

generally imaginary basis. The controversies are 
commonly accompanied by extremely personal mo- 
tives, and by tendencies to identify the classes either 
with their merits and services, or with their vices 
exclusively. 



PROFITS 37 

TOPIC VII 

On What Does the Income of a Manufacturer of Thread 
Depend? (of a Wholesaler? of a Retailer?) 

(a) What part is played by the value-adjustments discussed in 
topic IV? that is, does the fact that he has to make calculations 
about the machines that make machines in order to fix his prices 
involve an element of calculation on his profits, and in what 
way? Imagine yourself to be such a manufacturer. 

(&) What influence is exerted upon him by his observation 
of the profits of other manufacturers? Are the expenses of all 
the manufacturers the same? Then are profits equal or unequal? 
If profits are equal, what other diversity exists between different 
businesses? (Different processes for doing the same thing.) 

(c) So far as the question is general, i. e., common to all manu- 
facturers, what regulates profits? (Productiveness of industry?) 

(d) But what regulates choice of the branch of production? 
Wages in that branch? Cost of materials? Willingness of manu- 
facturers to accept little or much? Laborers? The general skill 
required under modern business conditions, i. e., the state of the 
arts and industries? The rate of interest? The desire to accumu- 
late fortunes? 

(e) How much would laborers be willing to pay their em- 
ployers? (Evidently the price of the loss of doing without 
them.) 

(f) Can cost of the material be eliminated from the question? 

(g) How strong is the influence of the mere ideals of living 
entertained by employers and laborers in causing them to be 
contented with low (or high) profits? 

(h) What different environment was offered by the state of 
the arts one hundred years ago? (Comparative skill, steadiness, 
sobriety of employers and men; supply of the same.) 

references 

Simon N. Patten: Cost and Utility, Annals, Jan., 1893. 

Simon N. Patten: Cost and Expense, Annals, May, 1893. 

Mill: bk. II, ch. V, sees. 1-3; bk. I, chs. VIII, X; bk. IV, ch. III. 

Marshall: bk. VI, chs. VI, VII, VIII. 

Walker: part IV, ch. IV. 

Boehm-Bawerk: bk. VI, ch. Ill 



38 EXERCISES IN ECONOMICS 

Hadley: ch. IX. 

Davenport: sees. 64, 65; Elements, ch. IV. 
Macvane: Political Economy, ch. XVIII. 
Andrews: Institutes of Economics, sees. 121-123. 

TOPIC VIII. 

On What Does the Income of a Farmer Who Hires His Land 

Depend? 

(a) On his rent? i. e., if the rent were lower his income at the 
time would surely be greater. But how about this supposition? 
Could rent be lowered? Does not competition fix rents? (See 
topic IV.) 

(&) Is it not to the interest of society to preserve rent? Is 
it to the interest of society to encourage differences among farm- 
ers' profits? 

(c) If rent be subtracted from the farmer's total production on 
the hired farm, then what affects his income? What difference is 
there between him and the manufacturer? Difference in environ- 
ment; nature of materials. Is land one of the raw materials? 
How does land differ from cotton? How about the relative im- 
portance of land and cotton in farming and spinning respectively? 
The amount of machinery and labor to be replaced in the places 
of the farm produce and thread respectively? 

(d) Will the farmer obtain higher profits than the manufac- 
turer as population increases and price of produce rises? 

(e) Will the fact that he will be induced by the high prices 
to cultivate more land lower his profits? 

(f) Why can not prices rise fast enough to counterbalance the 
poorer land? (Because the higher the price, the higher the 
wages as well as the greater the quantity of labor.) 

(g) Does this put the farmer at a permanent disadvantage 
with respect to the manufacturer? 

(h) Note the transitory and permanent influences in this 
topic. 

TOPIC IX 

The Price a Tenant Farmer Has to Pay as Rent for the 

Farm 

(a) Do all farms yield the same produce to the same labor 
and skill, at the same price of produce? How can farmers on 
25 bu. land compete with those on 30 bu. land? 



PROFITS 39 

(b) Will the tenant pay so much rent as to leave him less 
than he could earn in the long run at another business? 

(c) Will others stand by and let a man offer less than they can 
afford to pay, without bidding themselves? (See topic VIII (a)) 
Do tenants as a class, or landlords, fix the rent on each piece of 
land? 

(d) Which class makes the calculations as to whether it pays 
to cultivate, the land more intensively? (The landlord is sup- 
posed to make no improvements.) 

(e) Does the landlord take a residue? 

(f) When a man buys land, does he not calculate whether the 
rent will pay him? Do such calculations affect the question 
whether the rent is a residue to society as a whole? 

(g) Is rise of rent a gain or a loss to society? 

(h) Is rise of rent a loss to laborers and farmers? 

(i) Does general rise of rents indicate that the country is 
growing richer or poorer? 

(;') Who will be injured by a tax on rent? Can the landlord 
make the tenant pay it? How about tenants as a class? 

REFERENCES 

Marshall: bk. IV, ch. Ill, esp. footnotes; bk. VI, chs. IX, X 
(tenure, landlord's improvements). 

Mill: bk. II, ch. VI (as to competition, sec. 2); bk. Ill, ch. III. 

Davenport: ch. VII; Elements, ch. VII. 

Hadley: sees. 297, 318-326. 

Walker: part IV, ch. II, sees. 509-520 (as to amounts of land 
and labor "entering into" products). 

Ricardo: Pol. ±£con., ch. VI, On Profits. 

Andrews: sees. 103-199. 

See also references under topic XXIV. 



CHAPTER IV 

WAGES 

We have seen that the exigencies of complicated 
production have brought it about that different par- 
ties vie with each other for shares of the exchanged 
values. In other words, in cases of cooperation of 
many producers, where each person does not make or 
possess separately the article which is sold, it becomes 
a complicated question to determine what is his share 
in the sale. 

In order to settle this question with simplicity and 
deliberateness, it has been usual to assume the ex- 
istence of two classes of industrial persons: (1) those 
who are more identified with the forward movement 
of the times and with producing the changes that are 
continually taking place in industry; and (2) those 
who are contented to follow antiquated methods as 
nearly as the newly created conditions will permit. It 
is impossible to discuss the income of one of these 
classes separately from that of the other. They must 
vary inversely with respect to each other, since they 
both contend for a common fund. What is true of a 
single business, in this respect, is also true of indus- 
trial society taken as a whole. Since, moreover, the 
income of each industry is what it receives in ex- 
change, and since what all industries receive is noth- 
ing other than the total of what all produce and give 



WAGES 41 

in exchange, it follows that the total income is equal 
to the total production. However, we can draw no in- 
ference in any industry from the physical amount pro- 
duced as to what will be the amount brought in by ex- 
change, and we are driven to seek standards which are 
not physical. The process of value-adjustment is pre- 
cisely analogous to the process of clearing bank checks 
in a clearing-house : the amount of the debits is always 
precisely equal to that of the credits, so that the total 
amount after liquidation is neither greater nor less 
than that which existed when clearing began ; but the 
different banks find their relative balances changed. 

This total income of society may theoretically be 
so divided as to increase the balance to the credit of 
either the progressive or the non-progressive class. 
Our framework is large enough to allow of either al- 
ternative, and if one class is favored, that must be 
the result of special causes. Into these it is now our 
duty to inquire and by a gradual process to narrow 
the theoretical limitations on the height of wages. 

The very fact that the non-progressive classes do 
not foresee, calculate, wait, and accumulate, is suffi- 
cient to show that, notwithstanding that their partici- 
pation in production is actual and, if you will, 
meritorious, nevertheless their share of social income 
is somewhat passive. It is not so passive as is rent, 
for rent does not theoretically correspond to any effort 
of production at all ; but it is more passive than profit, 
for it corresponds to animal rather than to psychic 
activities. 



42 EXERCISES IN ECONOMICS 

Hence it was that it became customary to look upon 
laborers as the recipients of a fund or residual paid 
to them after employers had reserved their profits, 
and, according to some, after rents also had been de- 
ducted. It is true that Mill said that profit was what 
was left over after wages had been paid; but he also 
said that investment took place after capitalists had 
reserved what they chose for their own use. We thus 
arrive at the very simple conception of a fortuitous 
mass of laborers who are the recipients of a calculated 
fund. There is in this conception nothing deter- 
mined; everything is submitted to the arbitrary voli- 
tion of capitalists. Let us draw the lines closer. 

The capitalist, it is said, will be led by his desire 
for accumulation to invest all that his standard of liv- 
ing does not cause him to reserve for himself, and thus 
to employ laborers. The reality of this law is con- 
firmed by appeal to experience, the narrowness of 
profits in the business world showing that it is no 
arbitrary deduction that capitalists make from the 
product of labor and capital in determining the resi- 
due that shall go to labor. 

Leaving for a moment the study of the fund, we 
may pause to consider whether the non-progressive 
classes are destitute of all process of calculation, 
whereby, from their side, they may affect the share 
of each worker. If a laboring man make an inven- 
tion which increases the social production, he is apt 
thereby to cease to be a laboring man and to come to 
be associated with the profit-taking classes. Under 
the calculations of laborers as such we can not include 



WAGES 43 

those nice inquiries into the world-supplies of grain ; 
those nice adjustments of interest on securities, of ar- 
bitration, of exchange; those prolonged and expen- 
sive inquiries into industrial chemistry; those refined 
adjustments of the exactly proper proportions of ma- 
terials, of machinery, of processes, of foremen, of 
skilled and unskilled labors, which characterize the 
higher mental consciousness of the progressive classes. 
The laborers are, however, not without conscious 
or subconscious calculations. They must perceive 
that if they are too numerous they will compete 
against themselves, and hence they will naturally 
move from place to place in search of a locality where 
there is less competition of laborers, and more compe- 
tition of employers. They must perceive that they 
and their children will find competition of employers 
for labor more active in the skilled employments, 
which require education. They must perceive that 
ability to change one's trade is a most potent means 
of escaping the competition of other laborers. Gen- 
eral convictions along these lines can not fail to per- 
meate the mass of wage-workers, and to influence their 
conduct, especially in the multiplication of their num- 
bers and in the education of their children. Their sen- 
timents are, however, only too often directed towards 
affecting the conduct of others rather than towards 
modifying their own conduct. While perfect organi- 
zation of labor in trade unions is highly desirable for 
the sake of the exact adjustment and smooth working 
of our industrial economy, laborers make a mistake if 
they think that, apart from special cases, the whole 



44 EXERCISES IN ECONOMICS 

amount "reserved" by employers as wages for their 
own services would greatly raise the average if added 
to the income of laborers. 

The existence of different trades complicates the 
conception of competition among laborers. In very 
many cases laborers can not move from one trade to 
another. Capital, however, may be roughly assumed 
to have this mobility. Hence, within such trades, 
wages must depend entirely upon the available capi- 
tal ; and as this will fluctuate with the activity of the 
trade, wages will tend to fluctuate correspondingly 
without any counteracting competition from new la- 
borers moving into the group, or non-competition 
because of old laborers moving out of it. The develop- 
ment of capitalistic industry, however, is tending to 
decrease the rigor of the specialization of labor, while 
the spread of education tends to give the laborer more 
flexibility and enterprise. The demand for labor is 
becoming more and more a demand for trustworthi- 
ness. Employers ask, "Is this man one whom I can 
trust to tend a delicate and valuable machine?" no 
matter what the machine makes. Thus there is com- 
ing to be considerable reality in the conception of 
a general fund of capital offered to a general class of 
laborers. 

The truth of the conception lies, however, rather 
in the generality of the relation between capital and 
laborers than in the definiteness of the fund. It will 
be shown later (chapter VII) that the essence of capir 
tal consists in the intention of the capitalist to devote 
his wealth to production, and hence to devote a part 



WAGES 45 

of it, at least, to the employment of laborers. This in- 
tention suffices to put wages at the command of labor- 
ers. How much wages depends, of course, upon the 
state of the arts and upon the zeal and efficiency of the 
laborers themselves. While the laborers are non-pro- 
gressive, the fund itself is increased by the progressive 
activities that control it. We saw that the income 
of all businesses added together is equal to the total 
production of all businesses. In the same way, it is 
true that the income of all classes when added to- 
gether is equal to the production of all classes; and 
this again is equal to the production of all businesses. 
Here again the analogy of the clearing-house is com- 
plete ; what the classes take away after liquidation is 
equal to what they brought before, only it is differ- 
ently distributed. Hence those are wrong who 
imagine that the fund disposable in payment of par- 
ticular wages is composed of the material or tangible 
additions which individual laborers make to produc- 
tion. On the contrary, if there be, at a given moment, 
a great demand for labor, there is no reason why the 
laborers should not receive a part of the addition to 
the products of industry due to the skill of invention 
and management, and to the strength of character 
that waits. The non-progressive may partake of the 
fruits of Time. Hence it is generally wrong to say 
that capital and labor are enemies. In a North River 
tow, the tug-boat reaches the Erie Basin a long way 
ahead of the canal boats and barges that it has as- 
sisted on their voyage ; but the latter would have made 
poor progress if their owners had been content to let 



46 EXERCISES IN ECONOMICS 

them float down the river with wind and tide. The 
fund, therefore, devoted to the payment of wages is no 
stationary amount, but is continually augmented by 
progress, and forms a part of the general fund which 
is better thought of as the income of society. 

It is true that if we do not take any length of time 
into consideration, the conception of a fund does be- 
come more static. A rise in the money wages of 
laborers will cause a greater demand for laborers' 
commodities ; but as those commodities can not be sup- 
posed to be suddenly increased in quantity, it follows 
that their price will rise, and that the real income of 
the laborers will not be increased. If, however, time 
intervenes, the higher money wages will call forth a 
greater production of laborers' commodities, their 
price will fall, and laborers' real wages will rise cor- 
respondingly. The element of time, therefore, gives 
opportunity for full play of the calculations of em- 
ployers. In the case supposed, employers having more 
need for laborers were willing to pay them more 
highly, and the lapse of a short time was necessary ta 
realize their expectations. 

The more carefully the subject is considered, the 
more clearly it will be seen that, in spite of all the 
difficulties which may exist in the way of a clear per- 
ception of the laws which govern wages, it is certainly 
true that employers have no arbitrary discretion in 
the matter of paying wages. It is true the employers 
possess the legal title and management of the means 
of payment and the machinery and buildings; and 
that the calculations are made and the bookkeeping is 



WAGES 47 

cared for in their offices. It is but natural that the 
law should have confided the responsibility for the 
care and management of these weighty matters to 
the hands of the calculating and responsible classes 
in which, in point of fact, it found them ; for the fun- 
damental and controlling utilities in the case are eco- 
nomic and not legal. The law simply crystallizes the 
industrial facts as it finds them. 

The legal possession, in the hands of capitalists, 
must not lead us into the grave error of thinking 
that capitalists are at liberty to do what they please 
with what they may call their own. It is to be pre- 
sumed that they are at one with the laborers on at 
least one point : both parties are engaged in a common 
purpose of industrial production. They therefore de- 
sire the highest efficiency. Their self-interest, there- 
fore, compels them to reward effort in proportion to 
efficiency. Doubtless the duty of deciding who is 
efficient has been assigned to the parties in whose 
minds the elements of Time and Space have received 
the highest recognition, for such persons are most 
competent to perceive what actions do and what do 
not further a most advantageous combination of these 
elements. If, however, possession and calculation 
were in the hands of the laborer's, or of the state, the 
apportionment of income among the classes would be 
the same. In other words, capital and labor, whether 
in the largest sense or in the sense of particular in- 
dustries or businesses, must, in the long run, be re- 
munerated according to their efficiency. 



48 EXERCISES IN ECONOMICS 

"Efficiency" is not, however, a simple term. It is 
to labor precisely what the term "value" is to com- 
modities. Just as value is an equilibrium between 
the respective desires of exchangers, so is efficiency an 
equilibrium between the respective efforts of produc- 
ers. In the case of efficiency, as in the case of value, if 
it is absolutely necessary to apply a large amount of 
work, that amount of labor must be repaid. Hence 
we might further expound the theories of wages and 
of value by tracing the influence of necessary labor or 
"cost." 



WAGES 49 

TOPIC X 
The Wages the Farmer has to Pay for Common Labor 

(a) If the price of produce is high and hence apparently re- 
munerative to the farmer, will that enable the laborer to compel 
the farmer to pay higher wages? Could higher wages long be 
forced up in farming, while mining and other similar pursuits 
pay less? 

(b) Would you expect wages to be higher in Colorado than in 
Nebraska? If higher, is the difference due to the different em- 
ployment, i. e., mining, or to difference in environment, e. g., 
higher cost of living? 

(c) To what extent are the wages in farming independent of 
those in other employments? 

(d) To what extent will greater industry on the part of farm 
laborers raise their wages at once, and ultimately? To what ex- 
ten will improved agricultural improvements do so? Will they 
raise or lower wages immediate or ultimately? 

(e) To what extent will high cost to the laborer of his living 
enable him to force up wages? 

(f) What effect will the number of laborers applying for em- 
ployment have upon their wages in farming, and then in all em- 
ployment taken together? Could there be many in farming and 
few in spinning at the same time? How long a period do you 
mean by "at the same time"? 

(g) Can there be at the same time high cost of living to farm 
hands and low cost to spinners, or vice versa? 

(7i) Do improvements in agriculture raise spinners' wages or 
farm hands' wages? 

references 

Marshall: (summary on efficiency), bk. VI, ch. XI, esp. n. I, 
p. 754; also chs. I-V. 

Ricardo: ch. VI, esp. p. 92 (Bohn's ed.), ch. V. 

Hadley: ch. X. 

Walker: part IV, ch. V. 

Mill: bk. II, ch. II, and ch. V, sees. 4-5; (Machinery, Efficiency) 
bk. I, chs. VI, IX. 

Taussig: Wages and Capital, chs. I-II. 

Cairnes: part II, ch. I. 



50 EXERCISES IN ECONOMICS 

Boehm-Bawerk : bk. VII, ch. II. 
Andrews: sec. 30 and n. 3. 
Davenport: Elements, ch. IX. 

TOPIC XI 

The Wages that Manufacturers of Spool Cotton have to Pay 
for Common Spinners 

(a) Does the fact that the spinner does not cultivate the soil 
like the farm hand put him at a disadvantage with respect to 
the latter in obtaining food? (See topic X, (h).) Does he have 
an advantage in obtaining spool cotton for his private use? 

(&) Do our previous studies furnish us with any grounds for 
looking upon all "day-labor" in whatever employment as a class 
possessing common interests and fortunes? 

(c) In cotton spinning does a larger volume of business de- 
crease the price of thread? Do agricultural products decrease in 
price as their volume increases? Does the difference in the na- 
ture of these businesses affect the foregoing reasoning as to the 
equalization of wages on the farm with those in the factory? 

(eZ) Do improvements in spinning-machinery benefit spinners, 
employers, or farm hands? Immediate and ultimate effects. 

(e) Will a rise in money wages of spinners immediately benefit 
them, or cause, through increased demand, a corresponding rise 
in the price of their necessaries? 

(f) What changes in the direction of the production of the 
country are necessary in order that "real wages" or necessaries 
and other advantages received by laborers rise with money wages? 

(g) If business is bad do wages fall? 

(h) If the manufacturer fails, do the spinners necessarily lose 
their wages? 

(i) Then do wages come directly from the product? 

references 
Mill: bk. II, ch. II, sees. 2, 3. 
Andrews: sec. 114, n. 3, sec. 118. 
Marshall: bk. VI, chs. II-V. 

Davidson: The Bargain Theory of Wages, ch. IV. 
Walker: On Wages, chs. VII, VIII. 
Clark: Philosophy of Wealth, ch. VII. 
Hadley: sec. 354. 
Davenport: Elements, sees. 64, 65. 



WAGES 51 

TOPIC XII 
The Wages the Manufacturer Pays His Foreman 

(a) Is a foreman more of an assistance to the manufacturer 
than to the laborer? Is he paid because the manufacturer wants 
him or because the laborers want him? Is he paid in proportion 
as he is needed? 

(&) Do foremen form a class by themselves? If laborers re- 
ceive less, do foremen receive more? What personal character- 
istics must a foreman have different from those of a laborer? 

(c) Are foremen naturally "smarter" or are they children of 
parents who have taken more pains with their education? How 
about their adaptability? 

(d) In what proportion to each other are foremen and laborers 
needed? 

(e) Show in what way the above considerations would tend 
to make the wages of foremen higher than those of laborers. 

(f) Do foremen's wages tend to an equality in the same factory? 
In different factories? How do they differ in this respect from 
laborers? 

(g) Do they take any risks of the business? Are they to be 
classed rather with manufacturers than with laborers? 

(h) If foremen's ability were commoner than laborers' ability, 
which would receive the higher pay? 

(i) Does the foreman or the laborer stand a better chance in 
bargaining with the employer? 

(j) Is each paid according to the physical quantity or accord- 
ing to the value of his product? 

(k) Do foremen's wages "enter into" the cost of production? 
Why not do away with them and so reduce the price of the 
product? 

reference 

Marshall: bk. VI, ch. VII. 



CHAPTER V 

SPECULATION 

The preceding chapters were intended to prove 
that the industrial relations of men tend toward reg- 
ularity, so that, under given circumstances, we may 
expect them to be influenced by well-ascertained mo- 
tives in the distribution of wealth. The idea was ad- 
vanced that there is an industrial principle analogous 
to the physical principle of balancing, compensation, 
equilibrium, through which rates of exchange of com- 
modities or of services are established; and that the 
force which acts in, upon, and through the industrial 
equilibrium is the desire of men for each others' prod- 
ucts and services. The conception was made more 
definite and practical by the addition of the considera- 
tion that men's desires may themselves be analyzed 
according as they participate more or less in the on- 
ward movement of civilization. Thus Ave postulated 
the two classes of capitalists and laborers. It is true 
that the activities of men are a cause as well as an 
effect of the onward movement of civilization; and 
hence it may seem that Ave haA T e, by making the same 
persons the subjects of economic law and the causes 
of progress, i. e., of the action of a certain law, rea- 
soned in a circle, and thus offended certain logicians. 
In other words, the progressive classes cause progress, 
but were caused by the state of civilization. But it 



SPECULATION 53 

is not reasoning in a circle to select a single category, 
like economic life, from the whole mass of social phe- 
nomena which environs it, and then to look upon the 
condition of that environment as a cause of the vari- 
ous classes of incomes. 

The question now arises (in the popular mind, at 
least) whether it is right that the natural* laws exist- 
ing should be "permitted to act," and whether persons 
do right in acting according to those natural laws or 
in participating in the operation and maintenance of 
those laws. Is the market price a just price? Are 
market wages just wages? Economists have been 
fond of asserting that their science has nothing to do 
with right or wrong; it is merely a method of estab- 
lishing the nature and mechanism of industrial laws. 
But, since it can be of little use to establish such laws 
unless they enlighten our sense of justice and guide 
the actions of the citizens and of the legislator, it is 
useless longer to hold back from frank discussion of 
the moral question. It is possible that the doctrine 
of morality evolved from economic study may help 
out the general principles of ethics. 

In the first place, we shall doubtless agree in re- 
nouncing intuition as a proper basis and sanction of 
moral action. Doubtless our actions do actually fol- 
low intuitions, partly hereditary and partly acquired. 
We are creatures of habit. We rise, attend the shop 
and the market place, and retire, with regularity, uni- 
formity, and naive spontaneity. But our actions are, 
nevertheless, explainable from our circumstances and 

♦"Natural," not "statute," laws. 



54 EXERCISES IN ECONOMICS 

surroundings, and thus disprove the technical doc- 
trine of intuition, which is not a positive statement 
that we act spontaneously, but is a denial that causes 
are to be ascertained for our actions at all. 

In assuming that we act as we do because we our- 
selves are the result of circumstances, the difficulty 
still arises of distinguishing right from wrong action. 
It is at this point that the historical studies of recent 
years have been most useful. The impression has be- 
come a strong one among historical students that what 
is right at one time is not necessarily right at another : 
the whole system of guilds, of villeinage, of official 
price-lists, may have been very useful in an age of slow 
communication and narrow markets, when ability to 
make a machine was popularly regarded as a sort of 
necromancy, and when the laboring population was 
too improvident to be trusted with capital. "A 
Yankee at the Court of King Arthur,'' with his pro- 
posals for drastic and revolutionary measures, would 
justly have been looked upon as a most dangerous 
character. The conclusion was naturally reached by 
historians that every social period, and, in fact, every 
distinct society, is composed of a mass of coordinated 
phenomena, which are neither to be approved nor con- 
demned, but which are to be regarded as symptomatic 
of a stage of progress. From this the further con- 
clusion easily follows that individual actions are to be 
praised or condemned in so far as they do or do not 
conform to existing institutions and practices. Thus 
the man who would be looked upon by one race as 
physically normal might be despised as feeble by the 



SPECULATION 55 

people of a more vigorous race ; the man who acts upon 
the belief that he can fly is looked upon as crazy by 
people who do not believe flying is possible, although, 
as soon as flying machines were invented, he would be 
regarded as an inspired prophet ; the laborer who lives 
in squalor is now looked upon as an object of charity 
or of sociological experiment, whereas a hundred 
years ago people would have been astonished at the 
suggestion that it might be possible for a man of his 
class to live better ; when wheat is selling at a dollar a 
bushel, the man who gets two dollars a bushel is 
looked upon as a lucky child of fortune, and when 
wheat is selling at fifty cents a bushel, the man who 
gets a dollar is equally envied. 

Thus, in each social category, there arises the con- 
ception of action which is normal to the society in 
question; and acts which are abnormal are, in a gen- 
eral way, condemned, while those which are normal 
are called "right." 

The content of the word "right," however, is far- 
from being exhausted by the normal conception. 
Where progress is being worked out, there abnormal 
action must take place with a view to a complete re- 
adjustment of all the social categories. "Reformers" 
come forward with Utopian schemes, while large- 
minded men, in every walk of life, are endeavoring to 
introduce improvements and useful innovations. Evi- 
dently such persons are not to be condemned and 
branded as sinners. It is equally evident, however, 
that their actions belong to a different class from 
those of the persons who simply conform to what is 



56 EXERCISES IN ECONOMICS 

normal. If the normal and the progressive man both 
act "rightly," then the word "right" has two mean- 
ings. We may agree in applying the word "wrong" 
both to the non-progressive abnormal man and to the 
would-be progressive, but Utopian man. 

Much confusion has arisen from using the word 
"right" indiscriminately for that which is normal and 
for that which is progressive or ideal; and it is not 
too much to say that a large part of our practical in- 
consistency, of the hypocrisy with which Englishmen 
and Americans are charged by people of the Conti- 
nent, and of the glaring instances of inconsistency 
between preaching and practice, are traceable to 
this confusion of thought with respect to what is 
right. Thus we condemn cannibals theoretically, but 
no judge would think of ordering one cannibal hung 
for eating another cannibal; we preach against Sun- 
day trains, but Sunday trains will continue to run 
so long as they are useful; and we thunder against 
dancing, but the sermon does not ring in the ears 
the next evening. Now, each person is entitled to 
his own conception as to what is ideal in the matter 
of the meat he eats, or the days on which he travels, 
or the methods of social recreation, and it is proper 
that he should have ideals upon these subjects ; but it 
is evident that these ideals have nothing to do with 
what is normal at the moment. 

It is to be carefully noted that the distinction just 
made does not lead to the doctrine that "whatever is, 
is right." No such doctrine could ever satisfy a care- 
ful thinker. The expression, "whatever is, is right," 



SPECULATION 57 

omits to mention precisely that which is the essential 
characteristic of the real doctrine inculcated, namely, 
the normal or relative. The doctrine might, however, 
be stated in the following form : "Whatever is normal, 
is right." 

Let us now apply the principle of normal right to 
the gainful activities of man. Nothing is more com- 
mon than for persons engaged in one gainful occupa- 
tion to accuse those engaged in another of following 
a dishonest calling. One example is the common habit 
of sneering at lawyers; another is the charge that con- 
sumers are robbed by middlemen ; another is the very 
bitter feeling among farmers against grain specula- 
tors. Unquestionably, illegitimate business transac- 
tions are far too frequent; the only question is 
whether there is anything in the word "speculation," 
as commonly understood, that will help us to distin- 
guish the good from the bad, or whether it is not 
rather degree of speculation which establishes its de- 
sirability. The word "speculation" has so wide an 
application that to attempt to use it in a narrow sense 
as synonymous with bad speculation or gambling 
leads to confusion. In fact, in the French and Ger- 
man languages this word has a good meaning. We 
shall think more clearly, then, if we first inquire 
whether speculation in its broadest sense should be 
abolished, and, if not, how much speculation is 
desirable. 

It will readily be perceived that the total abolition 
of speculation would amount to the total cessation of 
those perpetual adjustments and readjustments of 



58 EXERCISES IN ECONOMICS 

the forces of production, exchange, and distribution 
which have formed the principal object of our atten- 
tion. Where are they absent from the industrial 
world? The retail dealer is busy with his "bargain 
sales/' his purchase of bankrupt stocks, his risking 
the carrying of a larger stock and a wider assortment ; 
the jobber studies the wants of his district, its tastes, 
its comparative willingness to pay for a genuine arti- 
cle or its preference for something cheap and shoddy ; 
the manufacturer seeks cheap supplies, labor-saving 
machinery, and by present losses hopes to gain a wide 
market and permanent sales. All of these parties 
are liable to be disappointed in their calculations — 
just as liable as is the workman looking for a job. 
Perhaps no business is more risky than farming. The 
vicissitudes of the seasons in a single locality, and the 
uncertainty whether those vicissitudes will be aggra- 
vated or compensated by vicissitudes in other locali- 
ties, render farming a most uncertain occupation. 
When we look at the boards of trade and at the stock 
exchanges, we find that the uncertainties connected 
with operations in those institutions are not, after all, 
so much greater than those of other businesses. Those 
who hold for a rise, protect themselves against a fall 
by selling "short," and those who sell "short" protect 
themselves against a rise by present purchases. In- 
dustrial, like other progress, depends upon experi- 
ment. Inventors and promoters benefit mankind 
more often than themselves. Silver, gold, and salt 
mines, fruit farms, irrigating works, all suggest to 
the mind many misfortunes and only possible success. 



SPECULATION 59 

The element of uncertainty exists as truly in all 
the industries mentioned, although not in so high a 
degree, as it does in gambling and betting. A most 
uncertain industry is the apparently benevolent one 
of keeping a private school. The opening day of the 
school decides for the year whether the master gains 
or loses. 

So far there will probably be no desire in any 
quarter to question our conclusions ; and further, the 
popular statement is not incorrect if it says that the 
test of legitimacy is not uncertainty but robbery. The 
test is whether each man bears his own losses, or 
makes gains at the expense of others. But this test 
is not a simple one. It seems simple to the popular 
mind, but it is really vastly complex. What is or is 
not robbery can not be left to the judgment of the 
party interested. It is small exaggeration to say that 
no bargain ever took place in which each party did 
not think that one or the other got the better of it. 

The analysis contained in the preceding papers 
shows that as the market becomes larger the market 
price becomes more and more important, and the rates 
of wages and profit tend to become more and more 
uniform. This means that with increasing complexity 
and sensitiveness of the social organism, there is 
evolved an increasing perfection of equilibrium. This 
equilibrium is normal : it is the result of existing 
forces. It is not ideal: it is possible to imagine or 
theorize about higher wages and lower interest, and 
smaller or larger profits. It may be that the realiza- 
tion of such imaginings would be a "better" state of 



60 EXERCISES IN ECONOMICS 

things. It is certain, however, that conformity with 
the existing normal prices, wages, interest, etc., is 
not "wrong" when practiced in a particular instance, 
and that conformity with less developed norms is 
"wrong." 

The principles of normal right are thus shown to 
be applicable to the conduct of particular businesses. 
Within those businesses, the question as to whether 
a bargain involves robbery is decided from the public 
point of view to be a question, not of private judg- 
ment, but of normal equilibrium. There remains, 
however, the further question of the legitimacy of the 
business itself. Why is gambling wrong and farming 
right? Is it right to deal in debts, stocks, bonds, and 
"futures"? It is idle to contend that this inquiry is 
outside of the domain of the economist. Like the 
questions of exchange and distribution, it is the orig- 
inal stimulus which impels to economic inquiry, and 
the science of political economy falls short of its orig- 
inal scope and aim if it does not continue its labors 
until it has rendered the final answer. The question 
of the legitimacy of a business will be subjected to 
the test of normal reasoning in the next paper. 



SPECULATION 61 

TOPIC XIII 
The Income of a Physician 

(a) What tendency would it have, if any, to move up and down 
with the wages of laborers? with those of foremen? with em- 
ployers' profits? 

(6) Is it shared with anyone or derived from a source, like a 
business income which is shared among many? 

(c) Do not those who employ a physician virtually share their 
income with him? 

(d) Is there any sense in which he shares his income with them, 
or at least his personal wealth, i. e., services? 

(e) In what way does his education raise his pay? Suppose he 
is unsuccessful. Is there any sense in which his failure aids 
to the success of rivals? 

(f) Can we distinguish the size of the fee from the size of 
the practice? Practice varies more than fees. 

(g) The large practice of the few induces many to practice 
who can not succeed. 

(h) Can we look on all physicians as a sort of a guild? How 
are they united for common gain? How does the total need for 
their services affect their total incomes as a class or guild? 

(i) Mention other cases like that of the physician. 

O') On the whole, is there a difference in principle between the 
forces which apply in this case and those in the last three? 

(fc) What do you understand by "merit" and "efficiency"? 

REFERENCES 

Marshall: bk. II, ch. IV, sees. 11-13; bk. VI, chs. IV, V, sec. 7. 
McLeod: Theory of Credit (second ed.), ch. XI, sec. 6. 
Mill: bk. I, ch. I, sec. 1. 
Davenport: Elements, sees. 28-30. 

TOPIC XIV 
The Gains of an East India Merchant One Hundred Years Ago 

(a) How long was the voyage? What was the knowledge of the 
market in China? What was the knowledge of what the market 
would be at home when the ship returned? 

(ft) What was the need of a supercargo? 



62 EXERCISES IN ECONOMICS 

(c) The sailors often had a share in a successful voyage; so in 
whaling. This form of partnership between owner and sailors 
belongs to a stage of industrial development prior to that of fixed 
incomes. 

(d) Danger from pirates. 

(e) Was the trade with Eastern peoples always free? How 
about the East India Co.? The African Co.? Was there not in 
these adventures an element of roobery? 

(/) Was there an element of gambling? Was not a capitalist 
in complete suspense for a long time as to whether he would lose 
or win? 

(g) If he won, what was the moral justification for his profits? 
Take the standpoint of the then existing circumstances. 

(h) Would such gains be looked on as right now? Is there 
really any sense or consistency in such a supposition as this one 
of judging former conditions by existing standards? 

(i) Do we conclude that we look upon the present methods of 
business as more right than the old because they are necessarily 
adapted to modern conditions? 

REFERENCES 

Emery: Stock Exchange Speculation in the United States, p. 
101 (Columbia University Studies). 

Hadley: chs. IV, V. 

Wells: Recent Economic Changes, ch. II, esp. p. 32. 

Cunningham: Growth of English Industry and Commerce, vol. 
II, sees. 206, 207, 254-6. 

TOPIC XV 

The Profits of a Firm of Corn Buyers Who Own Elevators 
Along the Railroad Lines 

(a) Can they calculate more or less closely on what they will 
have to pay and on what they will sell for than the merchant in 
the last paper? 

(b) Do they mean to buy when prices are low or high? How 
about selling prices? 

(c) Does buying when prices are low tend to lower them fur- 
ther or to raise them? 

(d) Does selling when prices are high tend to raise them fur- 
ther or to lower them? 



SPECULATION 63 

(e) Are calculations in (b) (c) (d) any more to be condemned 
when about large sums fhan small ones, in Chicago than in 
Wahoo? 

(f) What power have corn buyers to conspire to lower prices 
to the farmer? on the Chicago board of trade? If it is to the ad- 
vantage of some speculators to lower prices, will it not at the 
same time be to the advantage of others to raise them? 

(gr) "What power have farmers to conspire to raise prices? 
Have farmers influence with the legislature? 

(h) What fixes the price of corn? (cf., topics VII, VIII.) 

(i) The corn buyers produce no material goods directly; do 
they perform any useful service? Would farmers get better prices 
if each one shipped to the central market? Would consumers buy 
cheaper? 

(;) Grain may lie stored in a corn dealer's elevators over one 
season; is this necessarily an evil for a producer or a consumer? 

(k) Owing to the fact that certain natural forces may not be 
controlled by man and that industrial and commercial conditions 
are so complex that the ordinary human intellect fails rightly to 
analyze them and to understand the tendency of temporary move- 
ments or general development, there is a great element of uncer- 
tainty in all business. 

(0 What is dealing "in futures"? buying and selling on "mar- 
gins"? What is the danger in the first? the second? 

(m) Will the corn buyers make a more "regular" profit than 
the merchant of topic XIV? 

O) Is this business more or less of a "gambling" operation 
than that? 

REFERENCES 

Emery: pp. 105, 109, 113, 131, 137 (arbitrage) 159, 163, 166 
(normal profits). 

Andrews: sec. 21, n. 7 (speculation tends to make prices 
steady). 

Boehm-Bawerk : bk. V, ch. V, esp. p. 280 (arbitrage). 

Fisher: Appreciation and Interest, ch. I, ch. X, sees, 12, 13; ch. 
XII (organic nature of interest calculations). 

Mill: p. 417 (arbitration of foreign exchange). 

Davenport: Elements, sees. 112-127. 



(54 EXERCISES IN ECONOMICS 

TOPIC XVI 
The Dividends of a Stockholder in a Railroad 

(a) How does the income (dividend) of a stockholder in a 
railroad differ from that of a manufacturer of cotton cloth? Does 
it involve longer or shorter time-calculations? If it were greater, 
would not capital be withdrawn from manufacture, and vice 
versa? 

(6) Does investment in railroad stocks involve greater risk 
than in manufacturing? (The capital invested is fixed, can not 
be changed.) 

(c) Is it possible, if the railroad is the only one allowed by 
law, that the monopoly was necessary in order to induce capital 
to take the risk? 

(d) Do railroad dividends include wages of superintendents? 
Do profits in manufacturing? 

(e) The value of the stock is established by the degree of suc- 
cess of the road; the first stockholders gain or lose. 

(f) When the value of the stock is established, we have a 
"regular investment." 

(g) How does the investment differ in its legitimacy, its regu- 
larity, its morality, its legality from the profits of the firm of 
cornbuyers? (topic XV) and from the gains of the East India 
merchant (topic XIV)? 

(h) Is it right to apply the tests of one hundred years ago to 
the business of to-day, or the standards of to-day to the business 
of one hundred years ago? Environment. 

(i) Does railroad competition lower rates? Give an example 
of railroad rates and railroad dividends within your observation. 



CHAPTER VI 

INDUSTRY 

In beginning the second half of this series of 
essays, it is well to note a general shifting of point of 
view, which marks what is really a new grand divi- 
sion. The public point of view is still maintained. 
To drop it, would be to abandon the science of econom- 
ics. The study of the conformity of prices to a market 
or normal price involved the public point of view 
negatively rather than positively, by the exclusion of 
the individual's efforts and satisfactions as in any way 
a measure or test. In the questions of value and in- 
come with which we have had to deal, the positive in- 
terests were those of persons and of classes, or at 
least of commodities. But henceforth the public point 
of view will appeal to us positively. The question is 
to be one of general prosperity. We are primarily to 
envisage the whole community and to follow its suc- 
cesses and failures. The two grand divisions are those 
commonly denominated "exchange'' and "produc- 
tion." The distinction, however, is not so complete as 
is generally supposed. Each discussion involves the 
other. 

It is, therefore, entirely natural that we should fol- 
low the (distributional) discussion of just prices with 
a (progressional) inquiry into just businesses. 



66 EXERCISES INT ECONOMICS 

The element of Time was a potent means in our an- 
alysis of the calculations that enter into value ; in the 
following discussion it will play a still more import- 
ant part. It was then chiefly important in allowing 
us to describe and classify the participation of indi- 
viduals in industry. It is now important in allowing 
us to classify businesses as participants in progress. 
We may look upon Time as symptomatic of the whole 
industrial environment. In the first place, the length 
of calculations normal to the period in question indi- 
cates the stage of advancement at which industry is 
arrived; in the second place, different environments 
occur at different times as well as at different places, 
and thus, in a rather more superficial sense, time 
indicates the historical sequence of progress. It is 
also true that different environments do exist for dif- 
ferent classes and individuals at the same time and 
place. But into this refinement there is no reason at 
present to enter : it has already been partially treated 
in connection with the different industrial classes. 

It has been seen that a business is not to be con- 
demned simply because it involves risk. In fact the 
demonstration has gone to the point of showing that 
some risk is inevitable. With reference to the present, 
there certainly is such a thing as undue risk. It 
makes little difference whether the business man in- 
vests his own money or that of others intrusted to him 
in the form of private loan or in the form of stock sub- 
scriptions. The man who enters into an industrial 
enterprise with bad judgment will lose his money and 
that of the persons associated with him and confiding 



INDUSTRY 67 

in him. Perhaps the losses will extend to persons who 
are not proprietors, or loaners, but merely dealers on 
credit. To the extent to which they have sold to the 
promoter or speculator, they must be viewed as shar- 
ing in the business and its losses. The loss to the indi- 
viduals is a loss to the community. 

There is, however, a marked difference in the 
amount of risk that it has been customary to incur in 
different historical periods. Down to the end of the 
Middle Ages, the serious business of life was war. 
The promoters who took risks and responsibilities 
were kings and captains. Economic conditions were 
subordinate to political. With the opening of modern 
times, however, the fixed economic relations of men 
were rapidly relaxed. The interests of capital and 
labor became greater than those of political domin- 
ion. Mobility was introduced into industrial society, 
and alongside of the old political system arose an 
economic system which silently but surely superseded 
it. The battleground of adjustment, contention, risk, 
differentiation, progress, and evolution was now 
economic. In the risks of industry men imitated the 
risks of war. Piracy and commerce went hand in 
hand. Kings subscribed their private treasure to 
buccaneering expeditions ; merchant adventurers 
dreamed of the wealth of Ophir. In those times these 
means of money- getting were legitimate. 

Since these were the principal means of money-get- 
ting, accumulating capital found its way into them. 
The investors took tremendous risks and were pro- 
foundly ignorant about what was done with their 



68 EXERCISES IN ECONOMICS 

capital. Probably the best means of helping them was 
that of state interference. Companies were char- 
tered, and their powers and duties were defined by the 
state. The stockholders thus acquired a definite right 
of accounting against those to whom they had en- 
trusted their funds. Thus monopolies arose. In fact, 
monopoly was the only conception of industry and 
commerce natural to the medieval mind. The politi- 
cal dominance of the Middle Ages had accustomed 
men to arbitrary rule and had concealed the existence 
of a normal equilibrium. At the present day, de- 
mands for arbitrary prices and for state interference 
and distribution are a relic of medieval notions — con- 
ceivably useful when conservatively applied, but 
deeply injurious when held up as an ideal. 

These monopolies, which, as has been remarked, em- 
braced the whole field of wholesale trade, did not exist 
because the state knew more, but because individuals 
knew less. Because men were ignorant, short-sighted, 
and inexperienced, they were as yet incompetent to 
maintain nice equilibria of prices and wages. Some- 
how, in rough fashion, they accomplished a rude uni- 
formity in the face of great vicissitudes and through 
help of the antiquated machinery of politics. Gradu- 
ally the adoption of improved mechanical processes 
afforded the physical means of a nicer adjustment. 
Quicker communication, wider markets, and myriad- 
form products afforded the opportunity to develop 
individual foresight, individual knowledge, and indi- 
vidual business relations. Each man of means swung 
loose from a state interference to which he no longer 



INDUSTRY 69 

looked up, and embarked upon his individual enter- 
prises, upon his individual responsibility. The result 
has been greater certainty and uniformity. They are 
surely mistaken who claim that the general tendency 
of progress has been towards state monopoly. 

It appears, then, that decrease in business risk has 
gone hand in hand with decrease in state interference ; 
the wild speculation of the seventeenth century has 
disappeared, and along with it the chartered trading 
company. It is well, however, to repeat the proviso 
that there may, somewhere in the world, at the pres- 
ent day, be found an environment which duplicates 
that of the seventeenth century, and where seven- 
teenth century methods are still legitimate. 

A further stage of progress, however, is to be re- 
corded. The transition from the early chartered 
trading companies to complete individual initiative 
is not yet finished. The necessity for a combination 
of capitals will always exist. But the form of this 
combination, as well as its working, are less and less 
those of monopoly. Vast aggregations of capital are 
controlled by a single director or manager, because 
the technical conditions of production require such 
concentration; but his foresight surpasses infinitely 
that which was exercised by the state-controlled mo- 
nopolies of the earlier periods. Although the capital 
at his disposal is great, the world of capital is greater 
still. And even if he be enabled to gain a temporary 
advantage for the parties who have trusted him, he 
fears to excite a reaction which may ruin him and 
them. Obstinately to maintain an advantage in prices 



70 EXERCISES IN ECONOMICS 

at the expense of the consuming public will gradually, 
and sometimes very swiftly, arouse forces of competi- 
tion that will overwhelm and ruin his enterprise. 
The problem of the successful manager is that of so 
judiciously adjusting his tariffs as not to arouse the 
avenging arm of competition of the giant Capital. 
On the other hand, the system of credit allows the 
individual investor easily to withdraw from the enter- 
prise, and thus to control the manager's relations with 
him. The spectacle presented is, therefore, not one 
of state interference or of arbitrariness, (which is the 
real evil buried in the word "monopoly," as used now- 
adays) but one of ever-increasing delicacy of adjust- 
ment and of competition. 1 The modern corporation, 
instead of being the means of throttling competition, 
is really a form of its growth. It retains, it is 
true, many characteristics of the earlier period. Just 
as the old state corporations borrowed their form 
from the political life that existed before the economic 
period arose, so the great capitalistic enterprises of 
to-day retain some of the forms and defects of the 
period of state corporations. They still exist not so 
much by their wisdom as because the wisdom of in- 
dividuals is less. They still are tempted to take ad- 
vantage of a brief authority and to oppress the weak 
and confiding. The direction of the development, 
however, is away from reliance on the state and 
towards individual responsibility. 

1. The word " monopoly" has economic significance only in so far as it indi- 
cates an interference with normal equilibrium of values, or of incomes ("com- 
petition "). Undoubtedly serious disturbances of this kind do take place, largely 
through the short-sightedness of would-be captains of industry. 



INDUSTRY 71 

It may, therefore, be asserted with confidence that 
the test of the legitimacy of a business in general is 
the risk that it involves. Beyond a certain point risk 
is unnecessary and therefore wrong. A buccaneer ad- 
venturer would be now not only wicked but ridiculous. 
Any new enterprise is wrong if not reasonably assured 
of success. It is the duty of persons introducing nov- 
elties to go through careful experiments with a view 
of ascertaining the practicability of manufacture and 
the probability of stimulating a sufficient demand. 
On the other hand, risk is still unavoidable within 
reasonable limits. The undertaking of risk with a 
view to the widening of the field of investment is 
extremely laudable, providing all the parties con- 
cerned are fully aware of the possibility of loss, and 
provided they are willing and able to bear the whole 
loss upon their own shoulders. Nor is it unreason- 
able that those who invest in a mine and take the 
chances of the lode's "petering out" should be allowed 
unusual returns if it prove unexpectedly rich, or that 
those who adopt a new method should make more than 
average profits until others have been enterprising 
enough to make corresponding improvements. 

The test of business progress appears to be the de- 
velopment of business calculation. It becomes more 
and more common to foresee business events. Failure 
to make a reasonable forecast is abnormal; and while 
it is impossible to state just how long a calculation 
must be to be normal, business calculation probably 
has some connection with a conception already com- 
mon among economists — that of a normal period of 



72 EXERCISES IN ECONOMICS 

production. It is quite certain that the period for 
which capital is invested in manufacturing has 
greatly increased in modern times, and it may be 
affirmed that the period for which calculations may be 
reasonably made can not be shorter. It has not yet 
been possible to assign any particular number of 
years as the normal period of production and calcu- 
lation for the present economic epoch, but it may be 
asserted as a principle that Time of calculation is the 
normal test of the legitimacy of business enterprise. 
Calculations that are abnormally short are abnorm- 
ally precarious; the same is true of those that are 
abnormally long, for they are visionary. 



INDUSTRY 73 

TOPIC XVII 
The Interest Received by a Holder of Railroad Bonds 

(a) How does this case differ from those of topics XIV, XV, 
and XVI? Is the burden of risk changed? Is the loaner or capi- 
talist absolved from all risk? What resemblance does he bear 
to a wage earner in this respect? 

(6) Describe the almost insensible gradations in regularity, 
risk, certainty of calculation, and necessity for provision from 
topic XiV to topic XVII. 

(c) Suppose the limiting case of no risk on the part of the 
"capitalist," would he still receive "interest?" 

(d) Would he have accumulated capital if he did not expect to 
receive interest? 

(e) Would people pay interest if they could get capital without 
other people furnishing it to them? 

(f) Can a man get more as interest than can be produced by 
the capital when actualaly used for production? e. g., can the 
bondholder get more than the capital will earn when put into 
the form of a locomotive or railroad track (barring, of course, 
cases of loss from miscalculation in industrial technique or from 
disaster) ? 

(g) Can loaners of money on farm mortgages in the long run 
get more than the farmers produce? If less, how much less? Can 
they gain more, in the long run, than purchasers of stock or 
railway bonds? 

(h) Can the same capital be as easily loaned to a farmer as 
to a railroad? 

(i) Can there be one rate of interest (apart from risk) on farm 
loans and another on railroad loans? 

(;') State the principles regulating the rate and justice of 
interest. 

references 

Marshall: bk. Ill, ch. V; bk. VI, ch. I, sec. 9, ch. VI. 

Mill: pp. 217, 221. 

Hadley: sees. 299-313. 

Boehm-Bawerk : bk. VI, ch. VI; bk. VII, ch. I. 

Jevons: ch. VII. 

Walker: part IV, ch. III. 

Davenport: sees. 109-119; Elements, ch. VIII. 



74 EXERCISES IN ECONOMICS 

TOPIC XVIII 

When Does a Corn Speculator Gain at the Expense of Other 

People? 

(a) What is a "corner"? Is it a mere buying in expectation that 
prices will rise or selling in expectation that they will fall? Cf. 
topic XV. Is it an open buying on the market? 

(&) Do not speculators in corners try to obtain superior knowl- 
edge of the real supply, to keep that knowledge from others, and 
to buy secretly? Could there be a gain otherwise beyond that of 
topic XV. 

(c) Do corners rely upon "free competition" or upon restriction 
of the competition? 

(d) Are they best cured by restricting competition and "fixing" 
prices by law, or by facilitating competition? 

(e) A large amount of "money," i. e., capital, is needed in order 
to create a corner. If speculators could not borrow, could they 
even attempt such an operation? 

(f) Are corners often successful? Mention any successful 
corner that you have known of. 

(g) If a corner is successful, to what extent is the public 
robbed? By the excess over what the price ought to have been? 

(h) How high ought the price to have been? Would it have 
been a right and just price if competition had been free, i. e., if 
there had been a general knowledge of conditions? 

(i) If some people are "smarter" than others, ought they to 
gain more? 

(j) If a "speculation" succeed, is it the public or other specu- 
lators that lose? 

references 

Davenport: Elements, ch. XIV (speculation). 

Roscher: sec. 99 (stay laws), sec. 114 (official prices — "Taxen," 
"Maxima"). 

Patten: Theory of Social Forces, ch. IV, sec. 5. (The Social 
Man.) 

Hadley: sees. 118-124. 



INDUSTRY 75 

TOPIC XIX 

The Selling Price of a Painting by an old Master Inherited 

by its Owner 

(a) How high a price can the owner compel the public to pay? 
Can any other seller step in to reduce the price? Is the buyer 
compelled to pay the price? 

(&) Apply the same question to the fare on a city street car; 
to a railway which has the monopoly; to the owner of the 
"visible supply" of corn on which he has affected a "corner." 
(It is a practical question.) 

(c) Which is likely to net the larger income, a large number 
of small fares or a small number of large fares? 

(d) Is it more economical for a city to be served by two gas 
plants or by one? 

(e) In the case of the painting, is there any ground for saying 
that the buyer has lost or the seller has gained over their posi- 
tions before the sale? 

(f) Is there in all cases just ground for saying that the buyer 
is in a worse position, and the seller in a better, than they would 
have been in if there had been a "competition" of sellers — several 
sellers instead of one? (See topic I.) 

(g) In the case of the street railroad, may not part of the 
monopoly fare be legitimate compensation for risk? Cf. topic 
XVI. May it not also have been paid for as the price of the 
franchise? Do you know of any cases of this sort? 

(h) What resemblance does the corner in corn bear to topic 
XIV? Is it easy to make such a "corner"? Is it easier in a 
small market than in a large one? Is it easier to corner corn or 
gold or butter or potatoes or steel rails or cotton cloth? 

REFERENCES 

Marshall: bk. V, chs. XII, XIII (monopoly revenue); bk. IV, 
ch. XIII. 

Hadley: ch. VI. 

Davenport: ch. XIII; Elements, sec. 128. 

Mill: bk. Ill, ch. VI, sec. IV. 

Clark and Giddings: The Modern Distributive Process, Boston, 
Ginn & Co., 1888, 69 pp. (Especially ch. IV, "The Natural Rate 
of Wages.") 



76 EXERCISES IN ECONOMICS 

Andrews: (Trusts) sees. 45, n. 5, 46, 60 end. 
Von Halle: Trusts or Industrial Combinations in the U. S. 
Newcomb: Financial Policy of U. S., p. 28 (hard to corner gold). 
Ely: Monopolies and Trusts. 

TOPIC XX 

What are the Motives that Characterize the Industry of the 

Farmer? 

(a) To satisfy the primary wants of himself and family. 

(&) To expend active energy, to have the pleasure of doing, a 
pleasure of mastery, a feeling of power — affected by public opin- 
ion, by the "social mind," and perhaps by love for the soil. 

(c) Is (a) or (b) a predominant motive with the farmer? Com- 
pare in this respect a corn-speculator; a banker; an inventor; a 
goldminer; a clergyman. 

(d) Does the farmer satisfy all of even the primary wants 
with the produce of his own farm? How about corn, wheat, po- 
tatoes, beans, pease, beef, mutton, pork, eggs? Few New England 
farmers raise their own wheat. How about shoes, stockings, and 
clothes? How about newspapers? How about distant transpor- 
tation of self or goods? Give examples from your observation. 

(e) Is the farmer more "independent" than the mill-hand? 

(/) If the farmer does not make the boots he wears, is there 
still any sense in which they are the product of his labor? 

(g) Is there a sense in which everything he consumes is the 
product of his labor? 

(h) Is there a sense in which everything he buys at the store 
is a product of his labor? 

(i) Is there a sense in which what he makes and sells is the 
product of the labor of the purchasers? 

(;') Suppose he does not pay his debts, will he not have con- 
sumed the product of somebody's labor? 

(k) Can the amount of money in circulation (whether at the 
moment large or small) release him from working for what he 
consumes? 

(Z) Can a change in the amount of money in the community 
create goods for his use? The goods he consumes have been pro- 
duced by somebody. 



INDUSTRY 77 

REFERENCES 

Marshall: bk. II, cb. Ill, sec. 3; bk. III.i 

Cb. II. . 

Keynes: Scope and Method of Political^ what isproduc tion? 

Economy, ch. Ill, sec. 4. 

Simon N. Patten: Theory of Dynamic Eco- 
nomics, ch. XXI. 

Mill: bk. I, ch. IV, sees. 2, 6; bk. Ill, ch. I, sec. 3, ch. IV, sec. 3, 

p. 255 (effectual demand). 

Macvane: Political Economy, ch. II, Division of Labor. 

Macvane: The Austrian Theory of Value, III (division of la- 
bor), Annals of the Am. Acad, of Pol. and Soc. Science, November, 

1893 

Clark: The Origin of Interest (pure capital), Quar. Jour. Ec, 

April, 1895. 
Boehm-Bawerk: bk. I, ch. II (material capital). 
Marshall: bk. V, ch. VII, sees, 3, 4 (insurance vs. business loss). 
Davenport: sees. 88-90 (demand); Elements, sees. 13, 165. 



CHAPTER VII 

INDUSTRIAL CENTERS 

In our inquiry into the elements of economic prog- 
ress, it would not be improper to invade the family 
circle and even the solitude of the isolated house- 
keeper. The activities and pleasures of the latter 
might be studied and the saving care with which he 
betters his material condition might be exhibited, as 
if he were the prototype of a nation of teeming 
millions. As the inquiry, however, would necessitate 
the analysis of an individual into a little industrial 
society all by himself, it is perhaps simpler to begin at 
once with a real society. 

The statement is common and true that a political 
economy first appears with division of labor. Of 
course division of labor can only appear with growth 
of population. It is, perhaps, not wholly illogical to 
say that division of labor is the cause of economic 
phenomena; a better explanation, however, is that "di- 
vision of labor" is a short term which tersely calls to 
mind every generalization that one may have attained 
with respect to social industry; in other words, it is 
symptomatic of all industrial characteristics. 

To the superficially curious, the term implies 
simply a number of interesting physical facts which 
have already been closely associated with the element 
of Time. (See chapter II, Steady Prices, page 13.) 



INDUSTRIAL CENTERS 79 

Instead of each person or family supplying all his 
wants, he devotes himself to manufacture — that is to 
say, he produces one article. In the production of a 
single article, at a further stage of development, each 
operation is performed by a separate person. The 
family ceases to be a manufacturing group, but, on 
the contrary, many families become dependent upon 
each manufacturing group, and their wants are 
supplied by the goods obtained in exchange for 
its products, of which they themselves frequently 
make no use at all. The groups naturally produce 
that for which they have the greatest advantages, 
either from their own skill or from opportunities of 
climate, soil, or mineral or other natural resources. 
They are thus necessarily separated, sometimes at 
great distances from each other, and can enjoy each 
other's products only by means of railways and steam- 
ships, which thus bring to each group the products 
of all others. The mere fact that human beings must 
have light and air prevents them from huddling close 
together. Division of labor tends to bring closer to- 
gether the members of a single group, but draws the 
different groups apart from each other. The tendency 
of any one group to become too large for human com- 
fort may be counteracted by progressive subdivision 
of labor within the group. 

The growth of division of labor is caused by the 
experiences which men have of its advantages. The 
enormous increase of production is the common fact 
adduced in its favor, although persons with a tend- 
ency toward short-time views are to be found who 



80 EXERCISES IN ECONOMICS 

think that the great increase in production is an ar- 
gument against it, since they imagine that it affords 
means by which some persons may take advantage of 
others. All agree, however, that without division 
of labor none could have the opportunities which 
many now enjoy, for the products must be in existence 
before they can be utilized by any one. Persons of an 
objective and hopeful temperament perceive in divis- 
ion of labor a continuation of the plan which Nature 
has so admirably executed in organic life. The sim- 
plest organisms are a sort of jack-of-all-trades : they 
use the same physical means indifferently for alimen- 
tation, excretion, oxidation, and locomotion. In the 
highest forms, special organs perform these functions. 
There seems to be no limit to the extension of this 
principle. It is symptomatic of progress. Granting 
that man's spiritual nature limits his grosser wants, 
it may safely be asserted that, within these limits, ma- 
terial wealth indicates progress, that division of labor 
is the cause of material wealth, and that the organic 
law of specialization of function is manifested in di- 
vision of labor. 

Industrial centers are therefore characteristic of 
physical division of labor. But division of labor, in 
the aspect of it heretofore considered, hardly rises 
into the sphere of economics. It is merely a generali- 
zation of the technical facts of production. The in- 
creased material product is physically affected by a 
complex organism of boilers, belts, pulleys, and 
cranks. Economics, however, is essentially a study of 
motives and of human actions. To the economist, it 



INDUSTRIAL, CENTERS 81 

is these of which division of labor is symptomatic 
rather than physical facts. Capital, credit, and 
values are not technical but economic matters. Ma- 
chinery can only be produced, in the first place, by 
men who are willing to abstain from consuming all, 
perhaps, that they need for comfort. It can only be 
maintained by men who are willing to abstain from 
consuming in present enjoyment more than their in- 
come; and it can only be increased by those who are 
willing to curtail their present enjoyments still more. 
Economic Capital, therefore, consists in the attitude 
of mind and the motive by which men recognize the re- 
lation of capital-goods — the aforesaid boilers, cranks, 
etc. — to their material welfare, and act upon the 
belief in this relation ; and since industrial men may 
exchange their goods so that what is capital-goods 
in the hands of one may become consumption-goods 
in the hands of another, and the reverse, it appears 
that the important economic fact is not so much the 
form and substance of the material goods as the in- 
tention of their momentary possessor with respect to 
them. As we measure the total wealth of society not 
by the pounds or quarts of goods which it possesses, 
but by the utilities and enjoyments which the goods 
afford, so we may say that the capital of a country 
consists not of technical arrangements of production, 
but that it is a pure fund, a single productive ma- 
chine, consisting of the intelligent foresight, prudence, 
and industrial temperance of men. Capital is there- 
fore a characteristic of man, objectified in the use of 
machinery. Without it, industrial centers could not 



82 EXERCISES IN ECONOMICS 

exist. It is as necessary to technical processes as they 
are to it. Division of labor, therefore, is symptomatic 
of capital as well as of machinery. 

The isolated producer does not exchange. In a 
somewhat less primitive economy, it may be imagined 
that different processes of production are begun sim- 
ultaneously, occupy a considerable time, and are sim- 
ultaneously completed. In this case there will be no 
occasion for exchange during the production period, 
and all exchanges will take place simultaneously at 
the end of the period. The fact, however, is very dif- 
ferent from what we have imagined. All processes are 
not of the same length, nor does the intermittent out- 
put of goods correspond to the length of the period of 
production. Indeed, some products, like flour, flow 
in a continuous stream during all the hours of work- 
ing. But it is convenient that those engaged in later 
processes should find their raw materials ready at 
the beginning. Merchants have their active seasons 
of trade, and agricultural crops are gathered only at 
harvest-time. Since all have need of the products of 
each, and since those products neither can nor con- 
veniently should mature simultaneously, it follows 
that the very structure of industry demands that, on 
the average, those who finish goods should not be re- 
quired to replace the raw materials before the process 
is completed. It is, indeed, common for that portion 
of the capital-goods which consists of machinery to 
belong to the manufacturer. But whether this be 
so or not, the value of the products can be only such 
as to allow him to replace the raw materials and the 



INDUSTRIAL CENTERS 83 

wear and tear which belong to those specific goods and 
not to some earlier or later lot of goods. For if those 
goods were devoted to replacing the cost of another 
lot of goods, then presumably the cost of the first lot is 
not replaced at all. If, therefore, the outlay is made 
by the manufacturer himself, it can not be replaced 
until the goods are finished; and, by parity of reason- 
ing, if made by another person and sold to the manu- 
facturer, it can not either be replaced except at the 
end of the process. Industry, therefore, could not pro- 
ceed did not society wait for finished products where- 
with to replace expenditure previously incurred. The 
fact, however, that people are continuously selling and 
buying conceals this great economic truth of Waiting. 
We visualize the exchanges of the market-place but 
are blind to the Protean changes that take place be- 
hind factory walls and the time conditions that 

qualify them. 

Industry could not proceed for a moment wore it 
not that producers firmly believed that a use would 
exist for their goods when produced, and were pro- 
ducers and consumers not at hand to purchase raw 
materials and final products. Undoubtedly there is 
involved the moral quality which people chiefly have 
in mind when they speak of "honesty," "confidence," 
and "trust"; but the economic quality is that attitude 
of mind and motive which leads men to understand 
these time-necessities of productive exchange, and to 
act accordingly. In the economic world, therefore, 
Credit consists in a quality of men by virtue of which 
they produce special goods in the confidence of being 
able to exchange them. 



84 EXERCISES IN ECONOMICS 

Industrial centers, therefore, connote a series of 
phenomena which progressively rise from the material 
to the psychic world : they connote, first, local and per- 
sonal specialization in production and physical chan- 
nels of communication; secondly, those qualities of 
foresight, intelligence, and self control which cause 
men to create and keep in repair the special technical 
tools of production — the qualities being called Pure 
Capital, and the tools Capital-Goods; thirdly, the 
habit that industrial men have of recognizing in prac- 
tice the fact that different products must be ready at 
different times in order that the whole technical proc- 
ess of production in society may proceed as a unit — 
Credit. 

Since different processes are carried on by differ- 
ent men, it can readily be shown that credit is symp- 
tomatic of the fact that different producers have 
adjusted, or are trying to adjust, their operations har- 
moniously for social production. It thus happens 
that the field of credit is the scene of the chief legal 
relations of men. 

Capital and credit are functions of time; they 
enter necessarily into all the cases of value which we 
have studied as involving time; they are the essen- 
tially economic categories suggested by the terms 
"Division of Labor" and "Industrial Centers." 



INDUSTRIAL CENTERS 85 

TOPIC XXI 

What are the Advantages of the Elgin Watch Factory Over 
Domestic Watch Industry ? 

(a) Domestic industry prevailed in Switzerland: contractors 
or "capitalists" bought the different parts separately, from the 
families that made them. 

(b) Does the modern factory produce more? 

(c) More watches or more value? 

(d) More per workman? What is the part played by machin- 
ery? What is the cause of greater productiveness — capital, skill, 
or a new arrangement of tasks? Can increased productiveness 
in a factory be said to be due to a greater productiveness of 
labor? 

(e) Are watches produced by the factory cheaper than, and as 
good as, those hand-made? 

(f) If so, must the wages of the factory workmen be lower than 
those of the domestic worker? 

(g) Must the capital invested be larger? 

(ft) Is it possible that the higher value of total product should 
reward both capital and labor more highly? Or capital less and 
labor more? Is the profit per watch larger or smaller in the 
factory? 

(i) Would it be possible for the Elgin factory to thrive if the 
market for watches were small? 

0") Does the size of the market cause the industry to change 
from domestic to factory, or does the change cause the market 
to enlarge? 

(k) If you know how many watches sell for a high price, can 
you predict how many will sell at a low price? 

(I) Are the employees of the factory more "oppressed" than 
were the domestic workers of Switzerland, i. e., does the factory 
render them less free? Compare the "sweaters" of one of our 
large cities. Does the management of delicate machinery render 
men more or less careful and trustworthy? Will a drunkard be 
long retained in the Elgin works? Did it make so much differ- 
ence to the Swiss capitalists as it does to factory owners whether 
the domestic workers were temperate? 

(m) Is there more mutual helpfulness under the new system 
than under the old? 



86 EXERCISES IN ECONOMICS 

REFERENCES 

Roscher: sees. 67-76 (freedom). 

Marshall: bk. I, chs. Mil; bk. IV, ch. IX (machinery and pro- 
duction). 

Davidson: Bargain Theory of Wages, ch. III. 

Mill: bk. I, ch. VI; bk. Ill, chs. XII, XX, p. 109 (large market 
necessary for division of labor). 

Davenport: Elements, sees. 61, 62, 68-71. 

Andrews: sees. 43-45, 52. 

TOPIC XXII 

What Has Been the Influence of the Erie Canal Upon the 
Wealth of the United States? 

(a) V/here is the Erie Canal? What does it carry east? west? 
(&) What are the motives that cause men to send and bring 
these things? 

(c) Does it increase your wealth to get what you want? How 
about whiskey? How about Dakota wheat? Nebraska corn? 
Marquette iron? Houghton copper? Boston crackers? Lynn 
boots? New York ready-made clothing? New Jersey leather and 
pottery? Pittsburg steel? 

(d) Is it better to have a lot Df small industries in each town, 
or a few large ones? Why do we find textile industries in 
Lowell and Fall River, Massachusetts; iron in Pennsylvania; 
fruit in Florida, Delaware, and California? Why are similar busi- 
nesses in great cities located in the same quarter of the town, 
e. g., the lawyer's offices all together, the leather dealers together, 
the importers of dry goods together, a retail district, a wholesale 
district, etc.? 

(e) Why is the seacoast first settled and prosperous? 

if) Why is a country more prosperous that has many bays and 
rivers? 

(gr) How do canals and railways resemble bays and rivers? 

(7i) Is not a prohibition of trade equivalent to the disuse of 
the bays and rivers? 

(i) Does it make any difference in this respect whether the 
prohibition be of internal or foreign trade; i. e., if trade be pro- 
hibited between two parts of the same nation, will the effect be 



INDUSTRIAL CENTERS 87 

different, except in degree, from a prohibition of trade between 
two nations? 

(;*) Do you think better roads will benefit your county? Can 
the county afford to build them? 

(fc) Show that the difference between an isolated country and 
one that enjoys free communication with the rest of the world 
is like that between house industry (topic XXI) and factory 
industry. 

(0 Are English factory hands better off because they can buy 
American meat? Are American farmers better off because they 
can not buy English cloths? 

(m) Can the concentration of industries be carried too far? 
How about "trusts" and monopolies? 

REFERENCES 

Roscher: sees. 56-66 (division of labor). 

Marshall: bk. IV, chs. X, XI. 

D. A. Wells: Recent Economic Changes, chs. Ill, VII, X. 

TOPIC XXIII 

The Constitutional Prohibition of the Several States to Lay 
Customs Duties Against One Another 

(a) If each state laid such a duty, would its production be the 
same in kind and quality as if it laid a uniform income or prop- 
erty tax? 

(&) Would a change in kind or quality induced by customs du- 
ties tend to increase the value of the total production of each 
state? 

(c) Would it thus be possible to increase the total wealth of 
the United States? 

(d) If it would have such a tendency, does it not follow that all 
the counties should levy duties against each other? All the 
towns? Thus the nation would become still richer. 

(e) Is it not a great convenience to be able to send goods 
from New York to San Francisco without having them inspected 
and taxed at every state line? Would not such an interference 
itself be a heavy tax on industry? Sending in sealed cars under 
bond would not obviate all inconvenience. 

(f) Is there a bare possibility that one state might get the 
advantage of the others in customs duties, and thus actually 
"make money" out of its duties? 



$$ EXERCISES IN ECONOMICS 

(g) Could some states make money in this way except at the 
expense of others? Is such an advantage to be encouraged? Is it 
not a "monopoly" which can only be destroyed by free competi- 
tion? 

(h) If a state could possess such a monopoly against others, 
would it not probably be also true that the advantage from it 
would accrue to individual monopolists at home? 

REFERENCES 

Cairnes: part III. 

Mill: bk. Ill, ch. XVII; bk. V, ch. Ill, sec. 6, especially pp. 
578, 579. 
Macvane: Political Economy, chs. XXV, XXVI. 
Hadley: ch. XIII. 

Giffen: Essays 2d Series, Essay VI, sees. 6-8. 
Patten: Economic Basis of Protection. 
Carey: H. C, Works passim. 
Smith: Wealth of Nations, bk. IV, ch. II. 
Davenport: Elements, sees. 136-147. 
Andrews: sec. 57. 



CHAPTER VIII 

A RICH COUNTRY 

The elements of national prosperity, like most 
other matters difficult of analysis, are assumed in 
popular discussion. Perhaps it is more exact to say 
that the existence of a national prosperity which is 
subject to waxing and waning is assumed without at- 
tempt to analyze it into its elements. In the period of 
predominance of politics, before that had been sub- 
verted by the rise of economic activity, even the best 
writers saw in foreign conquest and in the tribute of 
conquered states the explanation of national wealth. 
And even after the reversal in the relative importance 
of politics and economics, to which allusion was made 
in chapter VI, writers reflecting current economic 
views looked upon foreign commerce as a sort of eco- 
nomic means of gaining a political tribute. No one 
suspected but that the state must decline which failed 
to receive in commercial exchange more than it gave. 
While this proposition holds true under the most re- 
cent theories, the then current explanation of it was 
untenable ; for it was not sought to compare the utility 
of the things imported with that of the things ex- 
ported to a nation in question, but the foreign nation 
was unnecessarily brought into the problem. It was 
naively assumed that the same things have the same 
value to all people, and that, therefore, if nation A 



90 EXERCISES IN ECONOMICS 

obtains more value than it gives, nation B must part 
with more value than it receives. Nation A could not 
gain unless nation B lost. No discussion of value 
had, however, actually arisen. Men were conscious 
only of physical quantities exchanged, and while it is 
absurd to deny that an ounce of watch springs may be 
worth more than a hundred pounds of pig iron, the 
reason for this difference did not enter into theory, 
and the theory of exchange suffered in consequence. 

Long experience, however, taught men that com- 
merce is mutually beneficial, without regard to phy- 
sical standards. A science of economics clearly dis- 
engaged itself from the general mass of political and 
social discussion, and a theory of value appeared as 
the central feature of this science, through which the 
mutual gains of trading were explainable. The theory 
of prosperity must needs now abandon the foundering 
wreck of the Political-Tribute-Idea. With Smith and 
Quesnay it boarded the fair frigate of Industry. It 
was the question of luxury, the discussion of which 
gave the impetus for the change. Since the bugaboo 
of impoverishment through foreign commerce had 
been sent to limbo, men's thoughts turned more to- 
wards domestic conditions, and abnormal tendencies 
in production and consumption became the center of 
gravity in discussions of national prosperity. Writers 
who clung to the form of the old foreign trade theory 
infused into it the new spirit by explaining that im- 
ported articles mostly were luxuries. Perhaps this 
was truer then than it is now. 



A RICH COUNTRY 91 

The whole discussion as to the sources of national 
welfare having thus been brought by a process of slow 
evolution, in which men have gradually accepted 
hints from the logic of events pressing thick and fast 
about them, to a rational economic basis, the way is 
made easier for an inquiry into the nature of wealth. 
If we turn to popular usage, we find that the term is 
used quite variously. In speaking of the "wealth" of 
a man, we exclude rigorously his personal qualities, 
even if they bring in a large income. The income is 
wealth, the qualities are not. His wealth is some- 
thing, perhaps, that he acquires with his qualities. 
If the qualities are merely potential, they have not 
given any satisfactory evidences of their existence. 
On the other hand, in speaking of national prosperity, 
the capacity of citizens to produce even the least tan- 
gible products of character or morals will often fall 
within the term "national wealth." The qualities are 
the heritage of the nation; they can not exist without 
manifestation; to name them is sufficient to indicate 
the chief source of national prosperity. The weight of 
usage, however, leans toward the narrower use of the 
term, from the simple fact that wealth is conceded to 
be characteristically a term of economics, and that 
weighty reasons of logic demand that the material ele- 
ments of prosperity be reserved for a distinct discus- 
sion and a distinct science. 

The line between wealth and capital can not be 
exactly drawn. Wealth includes a series of economic 
goods which, beginning with capital as the most dur- 
able, because reproductive, descends on the principle 



92 EXERCISES IN ECONOMICS 

suggested in the last paragraph, through a series of 
less tangible goods, until the limit of the tangible is 
reached, and, with it, the limit between the economic 
and the other moral sciences. Economics, however, 
is a "moral" or psychic science, for tangible goods 
simply indicate the extent of the "moral" or psychic 
interests involved. 

Perhaps nothing will better illustrate the psychic 
nature of economic science than a brief inquiry into 
the reasons why the temperate zone is more wealthy 
than the tropics. The statement is often made that 
anything is an article of wealth which saves to men 
trouble, exertion, and fatigue. This statement will be 
seen to need much qualification. In the tropics men 
do not need warm houses or costly heating appliances. 
They do not need warm clothing, and, in many lo- 
calities, nutritious food is produced at a very small 
expense. And yet every one will admit that, not- 
withstanding that the tropical climate enables vast 
amounts of labor and of preparation, indispensable 
in the North, to be dispensed with, nevertheless the 
people of the tropics are not the richer thereby. Sev- 
eral reasons may be adduced. Since the people of 
the tropics ar^ not exposed to the cold, they do not 
appreciate the advantages of their situation. The 
people of the North do appreciate the privilege of 
warm clothing and houses. A condition of wealth, 
therefore, lies in appreciation. Wealth consists in 
tangible goods as a matter of delimitation of the 
science of economics. But unappreciated wealth is 
not wealth, for it lacks the necessary relation of things 



A RICH COUNTRY 93 

to men. There can be no wealth without a wealth- 
user. 

A more fundamental explanation of the poverty of 
the trppics lies in the further consideration that the 
gratuitous supplying of one set of wants there has 
little or no influence in the stimulation of efforts to 
supply other and different wants. The question here 
is not precisely that in the last paragraph, for there 
we inquired whether we can properly say that what 
Nature supplies spontaneously is in all cases wealth. 
Here we inquire why the people of the tropics are not 
richer than they are? This is not a matter of defini- 
tion, but a question of cause. In the temperate zone, 
man attains to comfort through exertion. An activity 
of mind and body is thus established which survives 
the attainment of its original object. The satisfac- 
tion of old wants makes room for new ones. That is 
true to a certain extent in the tropics also. But in 
the North the activities aroused move forward spon- 
taneously to the satisfaction of the new wants; they 
do more; they go ahead of the wants, lead them on, 
educate them, and thus increase man's capacity for 
enjoyment and broaden the variety of his experiences. 

It is no chance, then, which has made the people 
of the temperate zone energetic and wealthy and the 
people of the tropical zone indolent and poor. It is 
by no chance that a people can not be rich without 
labor, for where the activity necessary for the creation 
of wealth is lacking, there the appreciation necessary 
for its enjoyment is lacking also. Production and 
consumption are two mutually necessary constituents 



94 EXERCISES IN ECONOMICS 

of man's activity, and an environment favorable to 
the one can not, in the long run, be unfavorable to the 
other. 

The tropics are no more favorable to consumption 
than to production, since they neither vary, refine, nor 
increase men's wants. Man may be analyzed into a 
producing part and a consuming part ; but those two 
parts can not be separated from each other. The man 
who produces more than he consumes does so in or- 
der that he may consume more in the future. 

The whole discussion may be summed up as fol- 
lows : when Nature renders a given amount of effort 
unnecessary, man is the richer thereby only if he 
apply the effort so saved to the supplying of some 
other want; if, however, he is content to accept Na- 
ture's favors as an absolute gift and relief from all 
effort, and as involving no obligation to maintain even 
his previous degree of effort, — in that case he una- 
voidably becomes poorer. 

We conclude, therefore, that the very fact that the 
inhabitants of the temperate zone obtain the neces- 
saries of life by much capitalization and labor entitles 
them to be considered as more wealthy than the in- 
habitants of the torrid zone, where necessaries are 
provided by the spontaneous bounty of Nature. At 
the same time, we admit that there is a very narrow 
and momentary sense in which the latter may be said 
to be the richer. But can the wealth of the people of 
the North increase in proportion to the increase of 
the physical means of satisfaction? The satisf action 
of the necesriries of life is a satisfaction of crude and 



A RICH COUNTRY 95 

gross wants ; when these demands have been met, more 
refined wants spring up. In general, it may be said 
that the more refined wants make a less demand on 
physical instruments. The wants of art and literature 
involve but little consumption of material goods. The 
artistic nature makes little demand for even the first 
necessaries of life; and yet its impalpable satisfac- 
tions are valued incalculably more than the gross nec- 
essaries. What, then, is to be our conception of 
wealth in the North? Economics is the science of 
man's relation to his material satisfactions. Must the 
economist claim that as a country becomes civilized 
it must increase in material means of satisfaction to 
an endless extent? That would be to claim that the 
peculiar phenomena in which he is interested should 
sometime swallow up the whole of social life — a nar- 
row conclusion, proving that the thinker has been 
mastered by his ideas. And yet this error has been 
not uncommon. Carl Knies says* : "It is an ancient 
and deep-rooted conception of political economy that 
the very trunk and branch of all its investigations con- 
sists only in the question : How may it be brought 
about that the greatest possible quantity of material 
goods be produced within a society? The country ap- 
pears almost like a colossal storehouse for which the 
people so strain their powers as to exert to their ut- 
most body and soul in order to bring into existence the 
greatest possible number of new goods, by means of 
which to produce still more new goods, or to trade 
with other nations." Another German professor, C. 

* Der Credit, II, p. 149. 



96 EXERCISES IN ECONOMICS 

J. Fuchs 2 with reference to the Manchester school, 
Avrites : "It looks upon the cheapest possible creation 
of the greatest possible quantity of material goods, 
especially the cheapest possible creation of necessaries 
of life and of the raw materials of industry, as the 
peculiar province of economic activity on the prin- 
ciple: 'to buy in the cheapest market and to sell in 
the dearest. 7 " 

If this definition of wealth, which the writers cited 
condemn, is to be consistently followed, the rational 
economist must hope that the production of wealth 
will stop before it has gone very far. If wealth, how- 
ever, consists in articles of value, he may trust that 
advancing civilization, by lowering the value of what 
is material and increasing the value of what is imma- 
terial, may ever advance in wealth, although the 
process may seem to result in destroying the material 
or physical basis of the science of economics. 

2 Die Handelspolitik Englands, p. 149. Cf. G. von Mayr, Die Pflicht im Wiith- 
schaftsleben, pp. 10-11. 



A RICH COUNTRY 97 

TOPIC XXIV 
How Does One Become Rich? 

(a) This question presupposes the ordinary state of civiliza- 
tion and industry. 

(b) He begins by efforts. 

(c) Trace his progress from wage-laborer to boss, to small 
contractor, to large contractor, or to partner or proprietor. 

(d) At each stage does he displace somebody else? If he does 
so, is this wrong? 

(e) Even if he displaces some person, does he not benefit 
others? How? Distinguish between rivals and customers in 
this respect. 

(/) Show how the enterprise and ambition of individuals, 
acting in this way throughout the whole of society, will cause 
a growth of social wealth. 

(g) Has the typical rich American benefited or injured his 
country by his career from farmer-lad up and on? 

(h) Does such a man grow rich at the expense of others? 
If he buy, can he be said to take others' produce any more 
than he gives his produce to others? If both have produced more 
than they had before, then both are richer before the exchange 
as well as after. They only exchange in order to consume, or in 
order to produce more. There is a sense in which they consume 
their own produce. (Cf. topic XX.) 

(i) If a business man sells out and then buys land and rents 
it, is he entitled to the rent? Is it right to confiscate his rent 
because it is a "surplus" and an "unearned increment." Suppose 
the man of whom he bought had really not earned the rent, is 
the buyer bound to give up his land to the state? Is the seller 
bound to give up his purchase-money? As land is constantly 
changing hands, is this procedure practicable? (All this is on 
the supposition that unearned surplusses are not a proper sub- 
ject of private property.) 

REFERENCES 

Henry George: Progress and Poverty, bk. VII, ch. III. 
P. A. "Talker: Pol. Econ., pp. 407-433. 
F. A. Walker: Land and Its Rent. 

Joseph Lee: Ethics of the Single Tax, Quarterly Journal of 
Economics, July, 1893. 



98 EXERCISES IN ECONOMICS 

TOPIC XXV 
How Does Society Become Rich? 

(a) The same supposition as in the last paper. 

(&) Give a resume of the way in which individual enterprise 
over the whole field of industry is spread over the whole field 
of consumption and satisfaction; in other words, is there not 
much truth in the proposition that private effort, industry, pro- 
duction, and improvements have a natural tendency to better 
the conditions of persons who are neither producers nor con- 
sumers, directly, of the particular product involved? 

(c) Is social wealth any thing else than the means by which, 
on the average, the wants of the individuals composing society 
can be satisfied? The individual is the end as well as the user 
of the means. "Society" is simply a short way of looking at an 
average condition and action of individuals, who act in concert. 
We study concerted action. 

(d) Does society become richer through speculation? Distin- 
guish different kinds of speculation. (See topic XV.) 

(e) Does society become richer through rent? 

{f) Enumerate businesses which add more or less to wealth. 
Does distilling add less than brewing or spinning? Is there any 
difference so long as the business is a habitually patronized 
business? If people want whisky and get it, are they not rich 
to that extent? Is rent-taking a business? Is stock gambling 
a business? 

(g) Is a river social wealth? A good climate? Does it belong 
to any one? 

(7i) Do you think of how much a thing will buy when you 
think of social wealth, or do you think of how much good it will 
do? Ultimate or immediate? 

(i) Are good laws social wealth? 

O") Can any laws make a people industrious? If people do 
not work, is it not because they are prevented rather than be- 
cause they need encouragement or assistance? 

(7c) Is it not true that assistance must come from without, 
while hindrance may come from within? But society has no 
outer region to draw upon; hence it must fall back upon its own 
individuals. 



A RICH COUNTRY 99 

REFERENCES 

Hadley: p. 78, n. 3. 

Giddings: Principles of Sociology, bk. I, ch. I; bk. II, ch. II, 
and pp. 379-80. 

Adam Smith: Wealth of Nations, Bohn Edition, bk. IV, ch. II, 
esp. pp. 457-8 (social wealth and the aim of the individual). 

Marshall: bk. II, ch. II, sec. 5 (national wealth); bk. IV, ch. 
VII. 

Lauderdale: Public Wealth, ch. II. 

Andrews: sees. 103 (Rent adds nothing to social wealth, cf. 
topic IX) -107. 

TOPIC XXVI 

What Is Wealth? 

(a) If all a man's desires were satisfied would he be wealthy? 
(&) Is it possible to satiate a man so that new desires will 
not arise? 

(c) Can a lazy man be wealthy except by chance? Are you 
sure he had so many wants until he got the property and learned 
how to use it? 

(d) Can a lazy society have wants except as they are suc- 
cessively aroused by their activities? 

(e) Are a people inhabiting a warm, fertile, enervating country 
so likely to become rich as a people inhabiting a bracing and 
less fruitful region? 

(f) Does not wealth, then, depend as much upon our activities 
as upon our desires? 

(g) Is wealth anything more than purchasing power? If we 
speak of the wealth of society, do we mean what it can buy from 
another society, or what it is able to enjoy, (1) because it can 
furnish the objects of enjoyment; (2) because it has capacity to 
enjoy them? 

(h) How far has existing society advanced in its grade of 
activities, and in its capacity of enjoyment? 

(i) At the present state of advancement, what relation have 
you found to exist between the activities of the individual and of 
society? If society sets a standard to the individual, what in- 
fluence has he, in return, upon society? 

(;') Are not initiation, invention, direction, ambition, just as 
much activities as hoeing, digging, chopping, sawing, cording? 

LifC 



100 EXERCISES IN ECONOMICS 

(fc) If the state assumed the initiation, invention, and direc- 
tion, would it not take away some of the individual's most 
precious activities? Would any form of wealth be likely to in- 
crease so fast? Is the supposition practical? 

REFERENCES 

Davenport: Elements, sees. 165, 16G. 

Marshall; bk. II, ch. Ill, sec. 4, esp. notes pp. 165-6. 

Andrews: sec. 37, n. 2. 

Rae: Contemporary Socialism, Introduction. 



CHAPTER IX 

LUXURY 

With advance of science, its logical requirements 
are more exacting. At early stages, men are satisfied 
with direct and simple answers; later on, they require 
answers to answers; and there seems no limit to the 
process. At any given moment, however, a limit is 
found in what is recognized as the momentary field 
or scope of the science in question. The truth of this 
law of evolution of applied logic is amply attested 
by the growing complexity of thought on the subject 
of Luxury. The simple treatment of the subject satis- 
fied only for a moment, after which it served as a prov- 
ocation to countless objections and inquiries rather 
than as a final solution. 

The old and naive view of luxury was characterized 
by the static or narrowly logical method that pervaded 
the beginnings of all science. As was noted in the 
last paper, questions of prosperity turned about lux- 
ury. Men were interested in the relations of produc- 
tion, population, and surplus; and the long series of 
authors whose work is epitomized by Mill found a 
simple, static, and logical solution of these relations 
in the greater or less prevalence of habits of luxury. 
Of course, a moderate development of theories of ex- 
change and value was necessary in order to prove the 
interdependence of industrial men ; and, this amount 



102 EXERCISES IN ECONOMICS 

of social solidarity once established, nothing was 
easier than to show that the welfare of the poor neces- 
sitated that the rich abstain from luxury. Convincing 
as this argument is, it fails to satisfy; for the answer 
is essentially materialistic : if a capitalist abstain 
from drinking wine, the value of the wine may be ap- 
plied more beneficently. In a typical and desirable 
case, it will be reinvested, that is, it will give food to 
laborers who will produce further wealth. There is a 
less desirable case which, however, is still preferable 
to the capitalist's drinking the wine himself: if he 
do not drink it, a poor man can. This explanation, 
however, halts upon a dreary, materialistic level ; for 
we have offered to us nothing better than a prospect of 
unlimited oatmeal porridge consumed by capitalist 
and laborer alike in the zealous and laudable design 
of producing more oatmeal porridge. 

As above hinted, dissatisfaction with this explana- 
tion is, on its logical side, to be referred to its statical 
or narrowly logical nature. What we want is an ex- 
planation that will really satisfy our conviction that 
luxuries are injurious, and will, at the same time, 
recognize the patent principle that, other things be- 
ing equal, no product ever has been or ever will be 
created too good, too rich, too beautiful, too costly, for 
men to consume. It at once occurs to us that while 
everything but oatmeal porridge was to be classed as 
luxury in an obscure Scotch town a hundred years ago, 
it may be perfectly possible that our porridge is meta- 
morphosed into a tuneful mahogany-case piano to-day. 



LUXURY 103 

Our problem then consists in conceiving of the ques- 
tion of luxury as one of a moving equilibrium. We 
may profitably mention some of the forces which, 
change though they may, must counterbalance each 
other with great nicety in order that society may ad- 
vance without impediment from the evils of luxury. 
Such a conception will be more truly kinetic and or- 
ganic, and will allow full play for man's psychic 
aspirations. 

In order to analyze the conception of luxury as a 
moving equilibrium, we must divide social activities 
into various categories, each of which is itself in mo- 
tion and striving for equilibrium within itself, and 
between itself and the others. For instance, it is evi- 
dent that an important condition affecting the con- 
ception of luxury is to be found in the comprehensive 
group of social wealth. In a rich community, it would 
seem that there is nothing reprehensible in many in- 
dulgences which would be unpermissible in a poor 
community. In the last analysis nothing can be 
said to be reprehensible that does not injure man's 
physical or moral well-being. Were all goods spon- 
taneously supplied the standards of indulgence would 
be physical and moral, but not economic. At any 
point short of spontaneous abundance, goods possess 
an economic as well as a hygienic, moral, etc., charac- 
ter. They are approved or disapproved according as 
they conduce to economic well-being; and hence the 
classification of goods from this point of view will 
vary greatly with the wealth of a society. The study 
of luxury is thus different from a study of value. In 



104 EXERCISES IN ECONOMICS 

the latter study, we are indifferent as to the ultimate 
effect of different goods in increasing or decreasing 
wealth. The inquiry is not whether people choose 
foolishly or wisely; the inquiry simply is as to what 
part their choices, such as they actually are, play in 
the mechanism of value-adjustments. The question of 
luxury, however, is a question of destiny ; it is proper 
to inquire as to the effects of different classes of goods 
on further production. This was the point of view of 
the Physiocrats, who claimed that cultivation of the 
soil was the only industry that really increased social 
wealth. In a sense, this was true of the France of a 
hundred and fifty years ago. The few manufactures 
were such as the people at large could ill afford to pur- 
chase, and for that reason were properly regarded as 
luxuries. But the England of that day was more in- 
dustrial, and hence Adam Smith assigned to manufac- 
tures a productivity which Quesnay denied to them. 
In other words, the body of the English people, poor 
as they were, could afford to live better than their 
neighbors across the Channel. The physical wants 
must first be supplied ; but when they are supplied, all 
anxiety about them ceases, the center of gravity of 
economic interest passes to the more refined wants, 
and, as they are successivelv supplied, they cease to 
become matters for anxiety or for possible reproach. 

A further analysis of the conditions of luxury may 
be made by considering the different goods in use at 
each epoch as forming an harmonious group. Of 
course, the reason why the different members har- 
monize at the given epoch, and not at others, is to be 



LUXURY 105 

traced to a thousand mental and moral influences. 
Moreover, there will be goods out of harmony with the 
rest, and those will be either goods which are falling 
out of fashion because they are unable to survive from 
an earlier epoch, or goods that are too refined for pres- 
ent conditions of production. The normal men of the 
epoch will readily acquire a taste for those goods 
which the subjective and objective environments re- 
quire, so that the normal consumption will seem to be 
the result of free choice, while it is really imposed by 
the environment. Thus, the Argentinian, although 
feasted by Delmonico, secretly longs for his jerked 
beef, and the Yankee for his cornbread. The con- 
sumption of goods that do not belong to the epoch- 
making group is immoral and hence luxurious. Such 
a good is, of course, possible of production, but the 
conditions are such that its production interferes with 
the production of the other goods. This interference, 
by rendering the latter more difficult of acquisition, 
increases at once their importance, because they lie 
closer to the physical basis of our existence, which, 
during our terrestrial life, at least, is indispensable 
to a moral, aestlieic, and intellectual superstructure. 
Inharmonious indulgence is immoral from the very 
fact that its effect, under the conditions of the epoch, 
is bound to be an attack upon the physical basis of the 
whole social structure. 

The conditions of consumption just considered are 
evidently themselves closely interwoven with condi- 
tions of production, which are, however, logically to be 
treated as another set of influences entering into the 



106 EXERCISES IN ECONOMICS 

equilibrium of luxury. Wants and their satisfactions 
should develop progressively from the physical to the 
psychic; but it does not follow that they will do so, 
without, at least, severe struggles and reverses. Tech- 
nical efforts to satisfy wants are not sure to follow the 
path of uniform progress. They may leave broad gaps 
in the industrial structure and thus render it unstable 
and shaky. A simple illustration will suffice: all will 
agree that the want for coarse food is more physical 
and primary than that for common woven goods. Ac- 
cordingly, a broad view of industry for the last two 
centuries will probably show that improvements in 
agriculture were prior to those in weaving. Neverthe- 
less, when the great inventions in weaving took place, 
the price of cloth fell rapidly, and great misery existed 
among weavers. Finally, with the abolition of the 
Corn Laws in England, and further improvements in 
agriculture and in transportation, bread-stuffs again 
fell in price, room was made for the production of 
finer goods, and the world at last began to feel the full 
effect of a new and more psychic combination of 
products. 

Such a combination of goods at any epoch consti- 
tutes a Standard of Living for that epoch. A luxury 
may be defined as that want-supplying good the use of 
which violates the epoch-making Standard of Living. 



LUXURY 107 

TOPIC XXVII 

A Rich Man Keeps a Yacht; Does His Expenditure on it do 
More Good Than Harm? 

(a) The sailors are benefited, 
(ft) The guests are benefited. 

(c) The makers of yachts, champagne, etc., are benefited. 

(d) Will the rich man grow rich as fast as if he reinvested 
in his business what he spends on yachts? 

(e) If all rich men spent all their surplus on yachts, would 
society grow richer? 

(/) If they spent all their surplus on "business," would society 
grow richer? (Cf. topics XXIV and XXV.) 

(g) Is there no room in society for yachts? How many yachts 
ought there to be? 

(h) Is the wealth consumed by the sailors replaced by them? 

(i) If all individuals in society consumed wealth and did not 
replace it, how long would there be any wealth at all? 

U) Is the champagne consumed on the yacht replaced by the 
labor of those who consume it? Is it the product of their labor? 
(See topic XX.) 

(k) Is it conceivable that all persons produce champagne 
alone? 

(I) For wealth to grow in society there must be a variety of 
production. 

(m) There must not be a production for present gratification, 
but a production for future gratification. 

(n) Future gratification includes the pay and support of 
labor in the future, i. e., necessaries. 

(o) The idea of luxury, then, includes that of the production 
of present gratifications. 

(p) Connect this with the idea of morality. 

(g) Do the building and use of the yacht benefit the poor in 
time of trade depression? 

references 
Davenport: sees. 259-274 (Fashion); Elements, pp. 256-266. 
Mill: bk. I, chs. II-IV. 
Boehm-Bawerk: bk. II, ch. V. 
Rae: Contemporary Socialism, p. 407. 



108 EXERCISES IN ECONOMICS 

Patten: Theory of Dynamic Economics, chs. XIX, XX. 
Veblen: The Preconceptions of Economic Science I, Quarterly 
Journal of Economics, Jan., 1899 (standard of living). 
Marshall: bk. VI, ch. II, sec. 3. 
Giddings: Principles of Sociology, pp. 123, 145. 
Andrews: 126-131. 

TOPIC XXVIII 

What Is Capital? 

(a) Is a yacht or a house hired out capital? 

(ft) Is a factory capital? Machinery or buildings? 

(c) Is a river capital? or is it "land"? 

(d) Is land capital? 

(e) Capital is associated with "business," not with "rent." 

(f) It is associated with future satisfactions. 

(g) Is the wealth spent by the rich man on his yacht capital? 
(Topic XXVII.) 

(h) Is it moral to consume all wealth as fast as produced or 
discovered? 

(i) Is it more moral to provide for champagne drinking next 
year than to drink champagne at once? 

U) Is it still more moral to provide for necessaries, or at 
least permanent or artistic products next year, provided present 
necessaries are at hand? 

(fc) Present value depends upon present preference regardless 
of morality; future values depend on a moral act. 

(Z) Would you infer from the above discussion that capitalists 
are immoral persons? 

(ra) In a socialistic society would not some one have to do 
what the capitalist does? Would he probably do it better than 
the capitalist now does? Can we look on the capitalist as an 
agent of society to provide for the future? 

(») How do you know that capitalists are paid too much for 
their services? (Cf. topics XVI to XVIII.) 

(o) Have there always been capitalists? What difference is 
there between development, growth, history, on the one side, and 
revolution on the other? 

(p) Is not free individual action self-government? Can there 
be any government except self-government? 



LUXURY 109 

REFERENCES 

Boehm-Bawerk : bk. VI, ch. V. (Proportion of amount of wealth 
to period of production.) 

Marshall: bk. II, ch. IV, esp. sec. 6, n. 1; bk. IV. ch. I, sec. 1, 
and especially ch. II, sec. 1. 

Hadley: sees. 297-301. 

Davenport: Elements, ch. XII. 

TOPIC XXIX 

Of What Good is Convict Labor? 

(a) Do convict laborers compete with industry? 
(ft) If convicts did not labor, would they cost more to the 
state? 

(c) If they cost more, that means that more taxes are levied. 

(d) If they compete, how long will the competition last? 

(e) Those who suffer from competition will produce something 
else. 

if) Are idle convicts more likely to reform than busy ones? 

(g) Is it better for them that they do something useful, or 
that they work a treadmill? 

(h) If the society in question is one where production is in- 
creasing, is it probable that the competition of convict labor will 
throw any one out of employment even temporarily — any more 
than newly invented machinery? 

(i) If production is not increasing, the employment of con- 
victs itself constitutes an increase. 

(;) The man who produces supplies himself, although it may 
be through exchange. 

(fc) Is it not a gain to society for convicts as well as others 
to supply their own wants? 



CHAPTER X 

CAPITAL 

We have already contrasted pure capital with capi- 
tal-goods (Chapter VII, Industrial Centers). We 
shall now inquire further into what capital does and 
into the effect upon our welfare of freedom in capi- 
talistic enterprise. 

Capital and capital-goods bear a relation to each 
other in the industrial life of society somewhat analo- 
gous to the relation between the mind and the brain 
of an individual man. We have seen that capital 
reaches its most sublimated form in the quality of 
mind which enables a person, perhaps to deprive him- 
self of present enjoyments, and, in any case, to calcu- 
late, contrive, and wait — with a view to increased 
future wealth. Capital, then, is that means of produc- 
tion which is calculated upon. This is the reason why 
land can be sharply distinguished from capital, from 
the social point of view, for land can be neither in- 
creased nor diminished, while machines are suscept- 
ible of indefinite multiplication. Of course this 
argument excludes the effect of the discovery of new 
land and of the permanent improvement of old land. 
The impossibility of changing the current endowment 
of heat and light of a given piece of land is sufficient to 
give a basis of reality to the broad distinction between 



CAPITAL HI 

land and capital. Capital, therefore, obtains its char- 
acteristics, not only from the fact that it cooperates 
in production, but from the fact that it has to be pro- 
duced first. Hence Roscher and others have defined 
capital as "the produced means of production." 

Descending now in the psychic scale from the mind 
of capital to its brain, we imagine further how it is 
that capital-goods must be treated in order that they 
may accomplish their full effect. The constant aim is 
that the greatest production be attained. This is nat- 
urally, but perhaps not quite correctly, expressed by 
saying that we endeavor to make our capital as pro- 
ductive as possible. Our real meaning is that we re- 
gret the necessity of having any capital at all, and 
would fain produce without it, or with as little as 
possible, but are unfortunately compelled to employ 
it. Now, the doing away with capital involves the 
invention of new processes occupying either the same, 
shorter, or longer time. If the new process occupy 
longer time than the old, the probability is that more 
capital will be needed, but that the increased capital 
will give greater proportional returns, and hence less 
capital will be employed in proportion to the product 
won. The main object is to obtain the greatest possi- 
ble return in proportion to the waiting and sacrifice. 
It does not concern society how great the waiting and 
sacrifice is so much as how great the return is in pro- 
portion to waiting and sacrifice. 

The doing away with capital absolutely or relatively 
to product necessitates new inventions. Longer proc- 
esses are usually different processes, and necessitate 



112 EXERCISES IN ECONOMICS 

additional machinery new in type. There is now in 
use more machinery than before, but the output has 
increased in still larger ratio. It is the opinion of 
Professor von Boehm-Bawerk that the latter is the 
normal case: in other words, that additions of capital 
necessitate inventions adapting it to longer time in- 
vestment. Indeed, economists generally make the 
statement that division of labor and consequent use 
of machinery increase only with the widening of the 
market. Interest, according to Professor von Boehm- 
Bawerk, is dependent upon the decreasing rate in the 
increase of production from lengthening the time in- 
volved in the process. The eminent author has fixed 
his mind upon the technique of capital-goods and has 
extracted from this technique a technical rule. Back 
of it all, hoAvever, lies the desire of man to obtain the 
greatest results with the least effort, and this mental 
attitude, when we think of capital (the category in 
which it finds chief expression), is what is meant by 
the word "capital" in the phrase "productivity of cap- 
ital." 

There has been an active discussion among econo- 
mists as to whether capital is, or is not, productive. 
Doubtless under the term "productive" is concealed a 
sense of moral approval, and thus the justification of 
interest is sought or attacked under cover. Now, if 
our point of view is purely technical and we are not 
looking for original or final causes — if we seek neither 
to blame nor to approve — we must admit that indus- 
trial products are due to the cooperation of nature, 
capital, and man. Further, if we compare the present 



CAPITAL 113 

with the recent past and note that capital, for in- 
stance, is being more and more employed in propor- 
tion to land and labor, we must logically say that the 
greater portion of product is due to capital, and hence 
predicate "productivity" of capital. The effect of this 
substitution is to hand over a greater proportion of 
the total product to the owners of capital only in case 
the substitution in question involves more expensive 
capital-goods. And this is the assumption of Pro- 
fessor von Boehm-Bawerk. The opposite case, how- 
ever, is perfectly possible. Consider, for example, 
what the wonderful invention of liquid air may do. 
Apart from its uses in surgery and hygiene (thus re- 
ducing the interruptions to man's labors through sick- 
ness), the universal reduction in the cost of fuel and 
the attainment of aerial navigation indicate the doing 
away vith a vast amount of mechanism, railway 
tracks, and other expensive capital-goods, and thus 
the avoidance of great cost in capital-goods without 
any conesponding increase in direct labor cost. 

Probably this industrial revolution would permit 
the survival of railway tracks for heavy freight and 
of other specimens of the present technical regime, 
just as all progress preserves within and about itself 
specimens of all prior stages of culture : the Lapp still 
survives in Norway, and the Bowery Boy still suggests 
to the New Yorker troglodyte days. 

If, however, we look upon man as the beginning and 
the end of economic action, we may find in him the sole 
cause, and may choose to say that he alone is product- 
ive. Professor von Boehm-Bawerk prefers this use 



114 EXERCISES IN ECONOMICS 

of language, and in this respect he agrees with the 
socialists; but he avoids the difficulty of saying that 
capital, an unproductive thing, should receive com- 
pensation, a moral payment, by spelling mind-capital, 
or pure capital, entirely out of industry. Producers 
are paid out of the value of the product. If the pro- 
duct be a distant one, the present labor employed upon 
it may claim, indeed, the whole of the future product, 
but a less number of present goods, for the latter are 
more valuable. The work involved in making the capi- 
tal-goods can not, therefore, claim the whole product, 
when the product is mature, for it has already traded 
away that product to capitalists for present goods at 
a time when those were more valuable. 

It was early perceived that the laws of Production 
were technical, depending on principles of physics, 
chemistry, and their subordinate or cognate sciences, 
and hence to a certain extent independent of other 
social phenomena, which nevertheless might be classed 
as economic. It was then conceived that over against 
the activities of production were to be set the rights, 
privileges, and enjoyments of consumption, under the 
comprehensive title of Distribution. It was further 
conceived that distribution might occur quite inde- 
pendently of production ; that man was at liberty to 
form "systems"; and that these systems might be 
made and undone at will by change of custom or by 
summary process of legislation. This conclusion is an 
error perhaps partly due to a confounding of method 
and observation. It is true that it is often convenient 
to divide economics into production and distribution 



CAPITAL H5 

for the sake of analysis and generalization; but it is a 
complete error to assume that the phenomena so sepa- 
rated for the sake of argument are not, in fact, inti- 
mately interdependent. The truth is that the 
conditions of production present themselves readily 
to us in a static form : so much capital, labor, and land 
are required for production ; the production period is 
so and so long; the law of diminishing returns has 
such and such effects; manufactures led fifty years 
ago, transportation is in the lead now. 

On the other hand, distribution confronts us at once 
with kinetic problems. A static consideration of ques- 
tions of rent, wages, and interest is so easily treated 
bv rearrangements of income through proposed legis- 
lation as to arouse our suspicion. On closer inquiry, 
we find that the phenomena of production and dis- 
tribution are in fact inseparable; that the laws of 
production are essentially dependent upon human 
activities and thought, and that the laws of distribu- 
tion are intimately dependent upon the processes and 
technique of production. 

Socialists say that people should be paid according 
to their needs, or, at least, according to their deeds; 
but this explains nothing. What are "needs" or 
"deeds" is either to be determined by scientific rules 
or is to be relegated to chance, fancy, and vagary. In 
the former case, those terms will themselves be found 
to connote a moving equilibrium in which the stand- 
ard of living must be analyzed into a standard of pro- 
duction and a standard of consumption, the action and 
reaction between which constitute the standard of 



116 EXERCISES IN ECONOMICS 

living. This standard must again be subdivided into 
the standards of different classes and of different in- 
dividuals, each of which sub-standards is again the 
resultant of more particular efforts and enjoyments. 
It will thus be perceived that the breaking up of a 
subject for the purpose of discussion is only safe if we 
remember that the subject itself is not broken up. So- 
cialists treat society like a statute which can be re- 
duced here and augmented there ; but society is really 
like a living man, and the process of taking a pound 
of flesh nearest the heart is a static chimera. 



CAPITAL 117 

TOPIC XXX 

Is it Betteb to "Make Money" ob to "Post" at the University? 

(a) Because we study the relation of each individual to the 
common weal as it actually exists, does it follow that we think 
that that relation and that weal can not be bettered? 

(&) The pursuit of science rather than of riches implies a 
change in the kind of material wealth produced. If all men 
pursued science, tastes would be greatly changed, and hence the 
nature of industries would be profoundly modified. How modi- 
fied? Does not pursuit of science require material wealth? How 
would buildings be changed? Would we eat as much? As rich 
food? Would we wear as many diamonds? Would we work as 
hard or harder? 

(c) Can a young man go to college unless some one (probably 
his father, possibly himself) has produced food, clothing, books, 
etc., for him? 

(d) If many people changed their ambition from mammon to 
science, would so many have private yachts? Would more have 
sail boats? Might general pursuits of science provide yachts for 
all? 

(e) If more people turned to art, would they be better, more 
useful, more helpful? 

(f) In case all turned from materialistic pursuits, would there 
be so much envy? Would people quarrel about differences in 
wealth? Would there be a labor question? Would it make so 
much difference to a man whether he owned a fine painting or 
merely had the privilege of looking at it in a public gallery? 

(g) Is there any power that can, through force, change the 
present state of fortune-hunting to a state of knowledge hunting 
and action-seeking? Could a change of form of the state to 
socialism or to communism produce the desired result? Must 
not the golden age result from inner development of the individ- 
ual? When that development has taken place, will there be 
any question of socialism? 

REFERENCES 

Marshall: bk. Ill, ch. VI, sec. 6. 

Giddings: bk. I, ch. IV, sec. 2; bk. IV, ch. IV. 

Clark: Philosophy of Wealth, chs. Ill, XI, cf. p. 44. 



118 EXERCISES IN ECONOMICS 

Patten: Theory of Dynamic Economics, ens. VIII, XI. (Fig. 
IV.) 
Andrews: sees. 126-131. 
Davenport: Elements, sec. 115. 

TOPIC XXXI 
Of What Good Abe Strikes? 

(a) Discuss the disadvantages of labor in dealing with capital. 
A few can act in concert better than many; a laborer can not 
spare his wares (labor) till their price rises; he can not easily 
trai\sport himself to where wages are higher. 

(ft) In principle, organization of each trade is praiseworthy: 
trades unions, etc. Their action is more efficient and may pre- 
vent strikes, i. e., gain points by mere argument. 

(c) If labor unions could guarantee the fulfilment of their 
agreements, might they not have the advantage over employers 
in bargaining? 

(d) Are the disadvantages of labor in bargaining a symptom 
of those personal characteristics which set laborers off from 
capitalists originally? (Cf. Topic XXVIII.) Take the body of 
laborers generation after generation: can they be said to possess 
the more foresight compared with capitalists? 

(e) Be careful to distinguish mere individual instances from 
the broad average. 

(f) Do the suspicion and distrust of laborers aid or hinder 
their negotiations? 

(g) Whose funds do the laborers have to draw upon to increase 
their salaries? How large is the fund? 

(h) If laborers knew just how much the funds were, would 
they be better satisfied? Will they believe what their employers 
say about it? 

{i) Is it exactly fair to the employers to force them to show 
their accounts? 

(;') Will not an improvement in human nature on both sides, 
more philanthropy of capitalists and more confidence of workers, 
help much? 

(k) Will a socialistic organization of the state change human 
nature, or must a change in human nature precede? 

(I) Can you give instances where the laborers have had their 
employers at a disadvantage? 



CAPITAL 119 

REFERENCES 

Clark: Philosophy of Wealth, ch. IV. 

Clark & Giddings: "The Modern Distributive Process," ch. IV, 
esp. sec. 6. 

Hadley: sees. 393-404. 
Mill: p. 183; bk. II, ch. III. 
Cairnes: part II, chs. Ill, IV. 
Walker: Wages Question, ch. XIX. 
Davenport: Elements, sec. 129. 
Marshall: bk. VI, ch. IV, sec. 6. 

TOPIC XXXII 
Of What Good are Usury Laws? 
(a) What is the exact meaning of "usury"? Is all interest 
usury? Is extortionate interest usury? Is it only usury to 
demand more than the statute allows? 

(fc) How did the legislature, in enacting a usury law, know 
how much it was fair to charge for a loan of money or capital? 

(c) If the legislature followed the market, what need to pass 

any law? 

(d) If the legislature did not follow the market, did it mean 

to favor debtors? 

(e) Can the legislature succeed in this last-named attempt? 
If the market rate is necessary to bring forward the needed 
capital, would not obedience to the law withhold the capital? 

(f) Does not the law, then, tend to raise interest on illegal 
loans, and to prevent legal loans? 

(g) Does this state of affairs promote either wealth or moral- 
ity? Is there any other standard of a just rate, then, than that 
established in free market? If "money" (i. e., loan capital) is 
badly needed by parties, should they not be allowed to pay what 
it is worth to them? 

(h) Are there cases of usury where people pay more than a 
thing is worth to them, i. e., people who are incompetent to 
judge, who are under compulsion or menace, who are not really 
free agents? Is not this real "usury"? Must not a court of law 
in each such case determine whether a stronger has taken ad- 
vantage of a weaker? The circumstances prove that there was 



L20 EXERCISES IN ECONOMICS 

ao "market," no "competition," no freedom of action in such a 
case. 

REFERENCES 

Roscher: I, sees. 53, 113, 192. 

Boehm-Bawerk: Capital and Interest, bk. I ch, I. 



APPENDIX 

PARTIAL LIST OF WORKS ON ECONOMIC HISTORY 

FOR TEACHING ENGLISH ECONOMIC HISTORY 

H. De B. Gibbins, "Industry in England," 474 pp., Scribner's, 1897. 

A shorter work is "Outlines of English Industrial History," 

abridged from W. Cunningham, 259 pp., Macmillan, 1895. 

FOR REFERENCE 

W. Cunningham, "The Growth of English Industry and Com- 
merce," 2 vols., 771 pp., 714 pp., Cambridge University press, 
1892. 

Thorold Rogers, "Work and Wages," 591 pp., Putnam's. 

Thorold Rogers, "The Economic Interpretation of History," 947 
pp., Putnam's, 1889. 

W. J. Ashley, "English Economic History," 2 vols., 227 pp., 501 
pp., Putnam. 
There is no good book for teaching American Economic History, 

unfortunately. However, "The Industrial Evolution of the United 

States," by Carroll D. Wright, 362 pp. Chautauqua Press, 1895, 

may be used with profit. 
Wright's "Practical Sociology," Longmans, 1899, 431 pp., offers 

a large amount of information about the United States which is 

applicable to economic purposes. 

OTHER USEFUL BOOKS 

Benj. Rand, "Economic History since 1763," 567 pp., John Wilson, 

Cambridge, Mass., 1892. 
David A. Wells, "Recent Economic Changes," 493 pp., Appleton, 

1896. 
There are many works on special phases and periods of Ameri- 
can Industry: 
Weeden, "Economic History of New England," 2 vols., Houghton, 

Mifflin & Co. 
Bruce, P. A., "Economic History of Virginia in the Seventeenth 
Century," 2 vols., Macmillan. 



122 EXERCISES IN ECONOMICS 

Beer, G. L., "The Commercial Policy of England," 167 pp., Colum- 
bia College Studies, 1893. 

Hammond, M. B., "The Cotton Industry," part I, 382 pp., Mac- 
millan, 1897. 

Taussig, P. W., "The Tariff History of the United States," Put- 
nam, 1892. 

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Hobson, J. A., Tne Evolution of Modern Capitalism, 383 pp., 
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Dabney, W. D., "The Public Regulation of Railways," Putnam. 



SEP 25 1900 



